Not Saving Enough
Looking at some of the top retirement planning regrets of older Americans collected by Motley Fool and Barron's there are a few key themes. The most common regret is not saving more for retirement. More than 57% of retirees in a Barron's survey wish they saved more for retirement.
Inflation Reduces Purchasing Power
The recent spike in inflation is fueling these fears as higher inflation erodes the purchasing power of retirement accounts. Future retirees may not be able to live on their projected budgets after significant price increases. According to CNBC the year-over-year price increase for public transportation was 23.8% and utilities are up 15.5%. Rents are up 7.2% and food at home is up 12%. Combine these cost increases and it is easy to see how monthly budgets become strained.
Not Working Longer
The same Barron's survey found that 37% of older Americans wish they had worked longer. Personally, I find this regret to be a red herring. No one in their 70s wishes they spent more years in the office. This regret is the same concern of not saving enough. Retirees who did not prioritize saving wish they worked longer to augment retirement savings. Some workers may also have been let go from jobs earlier than they expected. Unfortunately this is more common than many older workers realize. It is a big mistake for workers to delay saving for retirement because they are banking on a high salary in their late 50s or 60s.
Not Saving Early Enough
The Motley Fool reports that the biggest regret of retirees is not saving early enough. And this is where the reality of good retirement planning comes into play. Early savers benefit from years of compounding returns which has a snowballing effect on wealth. A worker saving $100,000 for retirement in their 20s will see this money grow for decades. Late savers miss out on these years of compounding returns.
The Benefits of Saving Early
To illustrate this point, NerdWallet showed that a person making $70,000 a year needs to save $502 per month (9% of their salary) to have $1 million for retirement at age 65. If the same person waits until age 40 they need to save $1,443 per month, equivalent to 25% of their salary. By waiting until age 45, the required monthly savings jumps to $2,164 or 37% of the person's $70,000 salary. Note that all scenarios assume a conservative 6% annual return on savings.
Tapping Retirement Funds for Non Retirement Expenses
The Motley Fool also found one of the biggest regrets of retirees was tapping retirement funds early to address financial needs. This is one of the worst mistakes because it deprives a person of the benefits of compounding interest and it imposes tax penalties. Early withdrawals from most retirement accounts are taxed as ordinary income but they are also subject to a 10% tax penalty. Retirement funds are not an emergency fund and accessing them prematurely derails future retirement goals.
Not Taking the Free Money
Another common retirement mistake is missing out on free money. Many employers offer retirement savings plans such as the Thrift Savings Plan, the 401k or the 403b. Most of these plans have an employer match for a portion of a worker's contribution. If an employer matches the first $5,000 saved, an employee can save $10,000 for retirement by only contributing $5,000. Taking advantage of this free money, especially early in a career, quickly builds a retirement portfolio and allows for the years of compounding returns mentioned above. There are few opportunities in life to get a 100% return on retirement contributions with zero risk.
Accessing Social Security Too Early (or Too Late)
A commonly cited concern of retirees is accessing Social Security Retirement Benefits early. However, other retirees regret not applying for these benefits earlier, particularly when their family history indicates a lower life expectancy.
Retirees born in 1960 or later can access early Social Security Retirement Benefits at age 62 but their benefits will be permanently lower. They will receive 70% of the benefits they would have received if they waited until their full retirement age of 67. But there is an advantage for waiting even longer. A person can wait until age 70 to start their benefits which will give them a 24% higher benefit than had they started payments at age 67. If a retiree has not saved a lot for retirement or has a family with a history of longevity this can be a great option.
When to start taking Social Security Retirement Benefits really depends on the health and savings of the individual. But the Social Security Administration's website has helpful calculators to help future retirees compare various options for when to begin taking benefits.
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