The 3 Biggest Retirement Savings Mistakes and How to Avoid Them

The 3 Biggest Retirement Savings Mistakes and How to Avoid Them

To avoid serious retirement planning mistakes, investors must be realistic about their future needs and expectations. It is all too easy to underestimate how much money you need to finance a comfortable retirement lifestyle. Many people unintentionally fall foul of three major errors:

1. Delaying

According to Federal Reserve statistics, just 37% of working adults are confident that their retirement savings are on track. About 19% are unsure where they stand, and a staggering 44% admit that their financial provisions for retirement fall short.

If you remember one thing about saving for retirement, it’s this: start now. Compound interest will help your savings go further: every dollar you save now will continue growing until you retire. Compound interest allows you to earn interest on interest, increasing your initial investment exponentially.

2. Failing to plan

Creating a realistic retirement plan is vital. It is easy to underestimate the cost of maintaining a comfortable lifestyle in retirement. A few factors to consider include your retirement location, planned retirement age, healthcare costs, insurance, and any major expenses like travel or a second home purchase. 

Many people assume that they will spend less in retirement than they did throughout their working lives. The conventional wisdom is that retirees tailor their budget to meet their income stream, but this isn’t always easy—most people don’t want to downsize their life just because their income has declined.

In addition, healthcare costs can be significant stumbling block for many retirees. When you’re young and fit, it’s easy to underestimate how much care you’ll need, and how much it can cost.

According to Investopedia, on average, a couple retiring in 2019 at the age of 65 would need to budget at least $265,000 to cover medical and health care costs. This figure does not include the additional cost of long-term care, which can range from $19,500 per year for adult day care services to over $102,000 annually for a private room in a residential facility.

Retirees spend an average of $3,800 per month, and Social Security is designed to provide just 40% of your work income. While it is tempting to believe that your spending will naturally diminish in retirement, for many, this simply is not the reality.

3. Investing unwisely

For those whose company offers a 401(k) plan, employer matching schemes offer a significant boost to retirement savings, enabling employees to benefit from what is effectively free money.

However, with organizations tightening their belts, such perks are becoming less common. For the self-employed and high net-worth investors, many financial experts recommend MPPs: the new, supercharged alternative to Roth IRAs.

MPPs (Malta Pension Plans) offer significant tax-saving benefits. They allow accountholders to receive tax-free distributions, draw down funds earlier, and contribute non-cash assets, such as shares of a business.

From a tax deferment perspective, MPPs offer unprecedented advantages. They enable high income US taxpayers to benefit from preferential tax treatment created by the US-Malta Income Tax Treaty. While contributions to a Roth IRA are capped at $7,000 per year, investors can effectively make limitless contributions to MPPs. In addition, unlike with a Roth IRA, there is no income cap for MPP investors, making them particularly attractive to high net-worth retirement savers.