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retirement mistakes

Retirement Mistakes That Can Cost You Millions

retirement mistakes

Retirement Mistakes That Can Cost You Millions

Often, we assume that the mistakes that ruin our retirement are those inflicted on us by a market crash that blows our nest egg, or an adviser who misleads us. Actually, the costliest retirement mistakes are of our doing. Here are some handpicked ones, and how to save yourself from making them.

Mistake 1 – Skimping on Saving

From a poll carried out by TIAA Cref’s Ready to Retire, almost half of the near-retirees when asked what they’d have done differently in preparation for retirement, said that they wish they had saved more. Failing to push oneself to save through the course of a career can be costly.

Take 25-year-old Tom for instance who earns $40,000 yearly, gets 2% annual raises and sends 10% to a National Social Security Fund or similar. Good effort but hardly colossal. Assuming he sticks to this regimen for a period of 40 years and earns 5.5% net return yearly from his investments, he would have a nest egg of slightly under $740,000.

That’s a neat sum especially in an African economy. However, assuming Tom increased his savings from 10% to 12% or 15%, he would have a nest egg of $890,000 or $1.1 million respectively. That’s a surplus of $150,000 and $360,000 respectively.

For most, having extra to spare for savings is not easy but if you are like Tom earning a good figure and able to squeeze in a few more bucks from your cheque, why not go for it?

Mistake 2 – Starting Late

The price of procrastination bites hard when it comes to compounding investments.

Assuming Tom in our example above goes with the 15% for the 40 years, he accumulates $1.1 million in his nest egg by age 65. However, assuming he pushed this much later and opted to start saving when he is 30. His sum total would be $875,000 assuming he kept the same regimen. That’s a loss of $225,000 for just a period of 5 years.

It gets worse if he pushes it even further to 10 years and invests at age 35. His nest egg would be around $680,000 putting him at a loss of $420,000.

The way to avoid this is by starting to save early, period.

Mistake 3 – Overpaying on Your Investments

Financial knowledge is key when starting on your retirement plan. You don’t need to be a guru, but you need to be hands-on and gather enough information.

Take Tom’s example for instance. He earns 5.5% net return. Say he got a deal of 7% but with yearly fees of 1.5% hence the net figure of 5.5%. Tom would have slightly over $1.2 million in his nest egg if he can reduce his expenses by just 1%. If he manages to get a further 0.5% reduction on cost, he could be looking at a nest egg of $1.4 million.

Simply, the high investment fees are costing him an average of $300,000 in potential savings for his retirement. While taking a government-sponsored social security fund can save you on some of these costs, you can also consider inexpensive options, some of which charge as little as 0.05% a year.

Conclusion

Ultimately, the smart way is to have a goal and come up with a plan you can implement asap. The retirement mistakes above are not unique to most retirees. It is very easy to delay on your retirement plan but guaranteed, the costs accrued might be costlier than you could possibly imagine.

Photo by Harli Marten on Unsplash

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