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Your retirement is an incredibly important financial priority. If you start early, invest intelligently and consistently, and use all the tools at your disposal, you can give yourself a strong chance of success. Still, because of the substantial amount of money you need and the time frames involved, it's quite easy to make a mistake when planning for your retirement.
Even worse, you only have one career to use to save for that retirement. If you make a big enough mistake, it might rob you of not only your money but also your time. Losing your time is what truly eliminates your chance at a financially comfortable retirement. The three mistakes outlined below are both easy and tempting to make, and by avoiding them, you set yourself up that much more for a strong likelihood of success.
Mistake No. 1: Waiting too long to get started It's tempting to wait until "later" to start saving for retirement. When you're just starting out, you may have school loans, probably aren't making a huge salary, and need to cover the start-up costs of establishing your independent life. Once you've established yourself, you might be starting a family, then come college costs for the kids, etc.
The reality is that at every stage of your life there's always something else you can be doing with your money other than saving it for your retirement. Still, the sooner you get started, the better off you'll very likely be. The table below explains why. It shows how much you need to save every month and in total if you want to retire at age 65 with $1 million and manage to earn 8% average annual returns along the way:
Table calculations by the author.
If you think it's hard to come up with $286 per month at age 25 to start investing for your retirement, imagine how much harder it would be to come up with $1,698 per month starting at age 45. Yet if you want to retire a millionaire, that's exactly the type of choice you face and why it makes so much sense to start earlier, rather than wait until later.
Mistake No. 2: Not taking advantage of free money Once you do make the decision to save for retirement, the first place you should seriously consider is a qualified retirement account like an IRA or a 401k sponsored by your employer. The reason: free money! It's tough enough to save for your retirement as it is, so why make it even tougher by ignoring the free cash that Uncle Sam and your boss may be throwing your way?
The first source of free money may very well come from your boss. Many employers offer matching contributions to employees who sock away money in the company's 401k. That's money your boss is offering you that's only available if you actually make the contribution. Matches come in varying levels, but a common one is $0.50 for every $1.00 you contribute, up to some percentage of your salary.
Additionally, qualified retirement accounts offer tax-deferred compounding -- letting your money grow faster than if you had to pay taxes on your gains and dividends along the way. Traditional 401k style plans offer tax-deductible contributions, and traditional IRA plans may offer similar tax-deductible contributions, too. Roth-style plans (both 401k and IRA) do require you to pay taxes on your contributions, but you can take qualifying withdrawals completely tax-free in retirement.
Mistake No. 3: Chasing fads rather than buying companies with your investmentsReal investing wealth is built over time, as companies profitably grow and prosper and their owners benefit from the cash those businesses generate. The stock market, however, doesn't take a predictable path along its journey. Indeed, Benjamin Graham, the father of value investing and the man who taught Warren Buffett how to invest, once said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
That voting-machine aspect of the market means that sentiment, not intrinsic value, drives the day-to-day market motion. When one sector gets hot, shares can skyrocket with no real value underpinning them. Those rising share prices attract more investment from people afraid to be left behind the trend and lose out on the apparent wealth being created.
The only problem? That sort of trend can't last forever, and at some point (though nobody knows exactly when for any given company), the market's weighing machine takes over and plummets those shares back to reality. If you don't know when the market's weighing machine will take over, you can't tell when the boom will turn into a bust, evaporating that apparent wealth.
As an investor, you can't control what the market does, but you can control where and when you put your money to work. Fortunately for you, not every company or industry participates in the market's periodic bouts with euphoria. If you are able to maintain your focus on the long-term value of a company and only buy and own its shares when you can clearly tie its price to that cash-generating value, you can better avoid and/or ride out the worst of the market's cycles.
In just the last two decades or so, we've seen boom-and-bust cycles in dot.com companies, in financial- and housing-related companies, and in energy companies. Yet through it all, people who've invested consistently without chasing the fad of the moment have made money over time.
Reach for the retirement of your dreams Nobody's a perfect investor and we all have losing investments from time to time. By avoiding these three mistakes, you can protect yourselves against some of the biggest risks to your retirement.
When all is said and done, you have decades between the typical start of a career and a traditional retirement age. Put that time to good use by investing early, taking advantage of the free money you can get along the way, and focusing on the cash-generating abilities of the companies you own, and you can vastly improve your chances of success.
The article 3 Easy Mistakes That Can Ruin Your Retirement originally appeared on Fool.com.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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