To save enough for a secure retirement, you typically need to put away around 15% to 20% of your income. Chances are good you aren’t doing that right now. In fact, it may seem impossible to save that much — especially if you’re one of the millions of Americans living paycheck to paycheck.
While it can indeed be hard to save money when you’ve got lots of essential expenses to pay, it is possible if you’re smart about where your cash goes.
Unfortunately, many people make some big money mistakes that end up sabotaging their ability to save enough for retirement. Here are four of those mistakes you might be guilty of.
1. Failing to take advantage of a 401(k) match
If you’re lucky enough to work for an employer that matches contributions to a 401(k), you absolutely need to contribute at least as much as necessary to get the full match from your employer. Otherwise, you’re missing out on free money.
Say you make $40,000 annually and your employer provides a 100% match on contributions up to 4% of your salary. If you want to save 15% of your income total, you can hit that 15% goal by contributing just 11% of income and your employer will make up the difference.
Your employer would be contributing $1,600 per year in this case, while you’d be setting aside just $4,400 to hit your goal. Even if your salary never increased and your employer continued to contribute $1,600 annually over a 30-year career, employer contributions alone would add up to over $180,000, assuming an 8% return on investment.
Missing out on more than $100,000 in cash by not contributing enough to earn the maximum match would definitely hurt your chances for building a big retirement nest egg. To avoid this act of self-sabotage, find out what the rules are for your employer’s match, what the maximum is they’ll contribute, and how much you need to contribute yourself to max out the matching funds.
The amount you need to contribute will vary depending how your match works. For example, if your employer matches just 50% of contributions you make, up to 4% of your salary, you’d need to contribute at least $3,200 of your money — 8% — to get the maximum match if you made $40,000. If you’re not sure how this works, HR or your 401(k) plan administrator will help.
2. Not taking advantage of tax breaks
Speaking of a 401(k), contributing to this kind of account makes sense even if you don’t get any employer match because you get to contribute with pre-tax dollars.
Contributing to an IRA also gives you tax breaks, as does contributing to a health savings account (if you’re eligible based on having a high deductible health plan).
When you set aside money for retirement, you should be putting it into one of these tax-advantaged accounts. If you do, the government helps to subsidize your savings.
For example, say you invested that $4,400 per year from our above example in a 401(k) or an IRA. By doing so, you could reduce a $40,000 income down to $35,600 for tax purposes. You wouldn’t be taxed on the $4,400 you contributed to your 401(k).
If you were in the 22% tax bracket, you’d save $968 on your taxes. So, you’d actually have reduced your take-home income by $3,432 even though $4,400 has been set aside for your future.
If your employer doesn’t offer a 401(k), opening an IRA with a brokerage firm or bank is easy. Sign up for an account, have your contributions transferred automatically on payday, and invest in a diversified portfolio to start taking advantage of tax breaks and helping your nest egg grow.
3. Buying a car that costs too much
While tax breaks and a 401(k) match make saving for the future easier, you still need money to put aside. Unfortunately, if you buy a car that costs too much, you’ll make it really hard to come up with the cash to invest.
In the second quarter of 2018, the average monthly payment on an auto loan to buy a new car hit a record of $525 per month, according to Experian. By comparison, the average auto loan on a used car is $378. If you stuck with the average payment but opted to buy used instead of new, you’d save almost $150 monthly.
If you invested that $150 monthly in a 401(k), you’d put aside $1,800 per year. If you did that every year for 30 years, you’d have a retirement nest egg of almost $204,000, assuming an 8% rate of return — just from opting to borrow for the average older car instead of a brand new one.
If you were able to save up to buy cars in cash instead of having a car loan throughout your career, you could end up with much more.
4. Overspending because you don’t live on a budget
One final mistake that’s far too common: not taking control over where your money goes. According to a Willis Tower Watson survey, just over one-third of people live on a budget — but those who know where their money is going are much less likely to struggle with their finances.
If you don’t have a budget, you may waste money on things without realizing it. Perhaps you spend too much on eating out or don’t realize how much your unused gym membership adds to your monthly expenses. Whatever your weak areas, you may not be aware of them.
To make a budget, start by tracking spending for at least 30 days. Figure out where your money is going and what cuts you can make. Then, create a budget that first allocates money to necessities — including retirement savings — before distributing what’s left over among your wants.
Don’t mess up your golden years
It’s up to you how financially secure you are as a senior. If you sabotage your retirement savings efforts throughout your career, you’ll likely spend your golden years struggling. The last thing you want when you’re too old to work is to have too little money, so make sure you don’t succumb to any of these big mistakes.