3 Retirement Strategies As Risky As Penny Stocks
Let’s be honest: we all want to get rich quick. That’s why so many of us invest, after all. But while some stick to proven investments, others prefer to take a risk on unproven penny stocks. It might pay off for a lucky few, but most never manage to outperform the market.
People make similar bets with their retirement strategy, not realizing that the consequences can be even more dangerous. Betting on the wrong penny stock can cost you your initial investment, but missing out in retirement can leave you penniless. If you want to avoid such difficulties, avoid the following three mistakes.
1. Defer retirement savings now with the intention of saving more later
Delaying retirement savings makes it much more difficult to save enough. When retirement is decades away, more immediate goals, like buying a house or paying for a child’s college education, may seem more important. But it is possible to borrow money for these other purposes. There is no way to borrow for retirement if your savings are insufficient.
Postponing retirement savings actually costs you money in the long run. If your goal is to save $1 million by age 65 and you expect an average annual rate of return of 7%, you only need to save about $403 per month if you start At 25 years. Over your lifetime, you’ll contribute about $193,440 of your own money, with the remaining $806,560 coming from investment income.
But if you haven’t saved anything for retirement until age 30, you’ll need to set aside $582 a month to reach your goal, assuming the same average annual return. This means that during your working years, you will need to set aside $51,000 more of your own money for retirement than if you had started at age 25.
Some people manage to save for retirement despite a late start, but the longer you wait to start, the more likely you are to fail. That’s why you should start saving for retirement as soon as possible, even if you can only save a few dollars each month.
2. Save an arbitrary amount without calculating how much you actually need
Everyone’s retirement plan is different, so there’s no magic formula to tell you how much you should be saving. For a long time, $1 million was considered the gold standard for retirement savings, but with inflation driving up costs and people living longer, many workers will need more than that to retire comfortably.
Some people can live comfortably with $1 million in personal savings, especially if they have social security and a pension to help them. But rather than hoping for the best, you should take the time to calculate how much you’ll actually need.
There are several ways to do this. A popular strategy is to save 25 times your annual salary. You can also try estimating your annual retirement expenses by thinking about your goals and how your current spending habits will change over time. Once you have an estimate of how much you will need to spend each year, multiply it by the number of years you will be in retirement and add 3% per year for inflation.
This can give you a baseline for how much you need, but your savings goal doesn’t have to be set in stone. If your plans change over time, you can always adjust what you regularly set aside.
3. Plan to fill a savings gap by reducing expenses in retirement
Those approaching retirement with a small nest egg can try to make up for their lack of savings by planning to reduce their retirement expenses. This might work for people who planned a lot of discretionary travel or purchases in retirement, but it probably won’t work for those who planned a frugal retirement all along.
There are certain expenses in retirement that you cannot control or eliminate. You will still need groceries, housing, and medical care, for example. Emergencies will inevitably occur in retirement as well, and they can also lead to unforeseen costs.
For those facing a retirement deficit, delaying retirement is often a better strategy. This reduces the length and cost of your retirement and also gives you more time to save. Your existing investments will also have more time to grow.
If delaying retirement doesn’t appeal to you, you might consider working part-time in retirement or starting your own business. These strategies can help you meet your financial obligations without worrying so much about unexpected costs.
Risk is a natural part of investing and planning for retirement, but if you want to grow – and maintain – your wealth, you need to avoid the high-risk strategies outlined above. Focusing on get-rich-quick schemes instead of slow and steady retirement savings will only create problems later on.