According to the National Institute on Retirement Security, about 40% of American households led by older individuals may face financial shortfalls in retirement.
So, whether you are nearing retirement or it’s a goal you are working toward, your daily financial habits can greatly impact your future comfort. A retirement fund is like a plant; watering it promptly and accurately will nurture and yield fruits. However, if you neglect it, it will wither away.
Here are 21 money habits that can drain a retirement fund quickly.
1. Saving Too Little
The longer you wait to save, the less time your money has to grow. You’ll face challenges paying your everyday expenses after retirement because you need more savings. Many working-age people won’t be able to maintain their current lifestyle after retirement due to insufficient savings.
2. Underestimating Medical Costs
Health can change unexpectedly, and medical costs tend to rise with age. Start focusing more on medical cost savings accounts to ensure you’re prepared for healthcare needs in your later years. Not only does this help you save for future medical expenses, but it also offers tax advantages.
3. Neglecting an Emergency Fund
While significant savings may go towards retirement, it’s essential to have an accessible emergency fund. Without one, you may need to use credit cards or dip into your long-term savings, setting your retirement clock back with every unplanned expense.
A recent report from Fidelity Investments reveals that retirement account balances in 401(k) have declined significantly because most people do not save for emergencies. When faced with a sudden expense, they withdraw their retirement savings or take out loans.
4. Supporting Your Adult Kids
Financially supporting kids is what parents see as the most important aspect of parenting, which is natural. But doing it at the expense of your retirement savings is not wise, especially when they’re old enough to support themselves.
5. Missing Out on Catch-Up Contributions
Many older people feel it’s too late to make a significant impact on their retirement savings. However, the IRS (Internal Revenue Service) provides catch-up contribution provisions, allowing individuals aged 50 and older to contribute extra amounts to their retirement accounts. It can be a golden opportunity to grow your nest egg substantially, giving you a better cushion for retirement.
6. Ignoring High-Interest Debt
High-interest debt destroys retirement funds silently. When debts accumulate, they can burden you, and the continuously increasing interest and fees will eat the income that should be saved for your future. People who succeeded in saving extra money for retirement had no credit card debts or other loans.
7. Hoarding Money
You might save money for your golden years, but it won’t be valued much at retirement. But why? Because you let the cash sit idle and didn’t invest it. If you’re keeping too much cash, it doesn’t grow or earn any returns, so you miss out on potential growth that could help you save more for retirement. By hoarding money, you may have less savings in retirement funds than if you had invested it wisely.
8. Wrong Investment Approach
People make these mistakes while investing in their 401(k). They either invest their money in the best-performing mutual funds or low-risk assets, resulting in fewer returns, or they invest all of their money in a single asset. It leads to less money in their retirement fund. Retirement wealth can be reduced to one-fifth if people fail to build an efficient investment portfolio in their 401(k).
9. Not Automating Savings
Automation can be a game-changer for retirement savings. Set up automatic transfers to your retirement accounts for consistent and easy savings without the temptation to skip a month.
10. Skipping Professional Advice
Professional advice can help you protect and grow your retirement fund based on your unique needs, goals, risk tolerance, and timeline. Without financial advice, you may lose key insights and make poor decisions about investments, market trends, and tax saving strategies that result in the loss of your retirement savings more quickly.
11. Not Maximizing Tax-Advantaged Accounts
Taxes can take a lot of your retirement savings if not planned properly. You must utilize tax-efficient retirement accounts, such as traditional IRAs or 401(k)s, to avoid losing significant tax savings and paying more than required. Neglecting tax planning and these accounts could mean missing out on tax-deferred gains that help your savings grow faster.
12. Withdrawing from Retirement Accounts Early
Withdrawing money from your retirement account can result in penalties or taxes on early withdrawals and the opportunity cost of losing out on those funds’ potential growth. Only use retirement funds when unavoidable.
13. Insurance Pitfalls
Opting for the cheapest insurance might seem like a savvy way to save money, but it can be risky. If your insurance coverage isn’t adequate, you could pay a lot more out of pocket in the case of an emergency. On the other hand, over-insuring means you’re paying for coverage you don’t need, which is also a waste of money. Carefully assess your specific needs and risks when choosing insurance plans for sufficient protection without overspending.
14. Lack of Financial Literacy
While it’s good to have professionals help with your finances, it’s important to understand where your money is and how it’s growing. Invest in financial literacy to make informed decisions. According to research, people who do not have financial literacy do not have retirement funds, and those who do are more likely to withdraw them before retirement.
15. Succumbing to Lifestyle Inflation
As you earn more, it’s easy to start spending more on things you didn’t need before, leaving your savings not growing as they should. Instead of overspending to keep pace with earnings, bump up your retirement savings percentage every time you receive a raise.
16. Overreliance on Social Security
Social security is there to provide you with a basic retirement income, but it should be treated as something other than the sole source of help for you in your retirement. Overreliance on it can prevent you from saving enough, leaving you financially vulnerable. Plus, the policies of social securities may change, which can also impact your retirement savings and allotted income.
17. Not Updating Beneficiary Information
Your will and your retirement account beneficiaries are separate. Keep your beneficiary information updated to ensure your retirement savings are passed on according to your wishes. In simple terms, provide the names listed as beneficiaries on your retirement accounts that match your current wishes, as what’s written there will take priority over your will.
18. Cashing out Retirement Accounts When Changing Jobs
Consider rolling over your retirement account into an IRA (Individual Retirement Account) or a new employer’s plan instead of cashing it out when changing jobs.
19. Making Emotional Decisions
Investment decisions based on fear or greed can lead to poor outcomes. Focus on the long term and don’t make impulsive financial moves based on market swings or news headlines.
20. Treating Investments Like Slot Machines
Risky investments or putting your money into stocks just because you have a “good feeling” about them can be like gambling with your future security. Making investment decisions based on research and sound advice is important.
21. Keeping Up With the Joneses
Trying to match the lifestyle or purchases of friends and neighbors can lead to spending money you don’t have on things you don’t need. This spending can quickly derail your financial goals and diminish your retirement savings.
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Aqsa is a passionate writer who loves spending her free time jotting down her thoughts. But that’s not all. She is a devoted mom to two boys and a skilled pharmacist specializing in hematology. When she’s not running after her energetic kids, you can find her lost in a good book or writing beautiful words. A nature lover at heart, she enjoys exploring the outdoors, staying active, and always seeking ways to learn new things.
