By Chris Heerlein
The saying that youth is wasted on the young may be especially true when it comes to saving for retirement.
“Too many people wait way too long to start thinking about how much they will need to finance their retirement,” said Chris Heerlein, a partner at REAP Financial LLC and author of “Money Won’t Buy Happiness” – But Time to Find It.
Heerlein said many young people are making at least three financial mistakes that they will likely regret when it comes time to retire:
Not participating in a 401(k)
Many employers don’t offer a 401(k) or similar retirement plan, but if yours does you need to participate, Heerlein said. An alarming number of people ignore this savings opportunity that can reap great rewards, especially if you start when you’re in your 20s and faithfully contribute for decades, he said.
“And if you’re employer is offering matching funds, that’s free money,” Heerlein said. “You need to jump on it.”
Saving only in a 401(k)
While contributing to a 401(k) is great, that shouldn’t be your only vehicle for saving, Heerlein said. “If you are a younger saver, you are putting all your money into a bucket you can’t touch for 20 or 30 years,” he said.
And when you do withdraw it in retirement, you’ll pay taxes because the taxes were deferred. That’s why it’s important to put some balance in your portfolio.
A good way to do that is with a Roth IRA, a Roth 401(k) or a health savings account. Withdrawing from those Roth funds in retirement won’t result in taxes because the taxes were already paid when the money went in the account. HSA money isn’t taxed if you withdraw it for qualified medical expenses. After you turn 65, you can withdraw it for any purpose, though you will pay taxes on that withdrawal if not used for a qualified expenses.
Failing to embrace risk
When the 2008 financial crisis hit, plenty of investors lost a substantial portion of their savings. The memory of what happened to them – or to their parents – is still having repercussions. Some people younger than 50 are too conservative with their investments, Heerlein said, so their money doesn’t grow like it could if they took more risks.
“I’m not faulting people for that, but what I want to get across is if you are between the ages of 20 and 50, there is no need to panic,” Heerlein said. “Time is on your side. If you suffer a loss, you more than likely have plenty of years to recover before you retire.”
Many people nearing retirement probably look back to when they were in their 20s and 30s and wish they could go back in time and make some financial decisions over again.
Chris Heerlein has been featured in national media outlets such as Fortune, Bloomberg Businessweek, and Money magazines. He is a regular contributor to the financial publication Kiplinger.