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3 retirement savings pitfalls and strategies to help avoid them

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Kelly McShane, CFA
Analyst, Client Needs Research

Planning for retirement is one of the most significant financial endeavors you can undertake. Yet many people find themselves unprepared when the time comes. Missteps along the way can significantly impact your ability to meet your retirement goals.

The good news? These pitfalls are often avoidable.

Here are three common mistakes people make when saving for retirement and actions you can take today to help avoid them.

Pitfall No. 1: Leaving money on the table

Many people believe they have ample time to save for retirement, or they prioritize other financial goals. However, when it comes to retirement savings, time is a critical factor.

Compounding interest — or the earnings your earnings make — can significantly increase the overall growth of your retirement savings over time. Delaying saving for retirement by even a few years can mean leaving a significant amount of money on the table.

Chart showing cost of waiting to save for retirement Source: Edward Jones estimates. Assumes investing $700 per month with a 6% annual return. This hypothetical example is for illustrative purposes only and does not reflect the performance of a specific investment. Values rounded to the nearest $5,000.

Employer matching programs, where your company matches your retirement plan contributions up to a certain percentage of your salary, can be instrumental in helping you achieve your retirement savings goal. Failing to take full advantage of this benefit — by not participating in your plan or contributing less than the match limit — is like turning down free money.

How to avoid this pitfall

  1. Start saving now. The sooner you start, the more time you have to grow your retirement savings. Even modest amounts invested over the long run can have a magnified impact on your financial security during retirement.
  2. Take full advantage of employer-sponsored benefits. Try to contribute enough to your 401(k) or similar retirement plan to receive the full employer match, if one is offered. It’s an immediate 100% return on your investment, and you likely won’t find that type of return anywhere else.
  3. Increase your savings over time. A good milestone to work toward is saving 10% to 15% of your gross income (including employer contributions) for retirement. Start saving what you can afford and gradually increase the amount each year, especially as your income rises.

Bonuses and tax returns are also effective ways to boost your savings without changing your standard of living. Ultimately, you’ll want to save the amount each month that puts you on track to meet your retirement goals.

Pitfall No. 2: Failing to have a plan

You may have heard the saying, “Failing to plan is planning to fail.” When it comes to saving for retirement, this couldn’t be truer.

Without a clear plan, it’s easy to underestimate how much money you’ll need in retirement. This can lead to insufficient savings, forcing you to delay retirement or downsize your lifestyle — or both.

How to avoid this pitfall

You have a lot to consider when designing a retirement plan that’s right for you. You’ll want to look at your desired lifestyle and expenses in retirement, current income and savings, and your time horizon. To start developing a plan, ask yourself:

  1. What are my goals for retirement? Consider your desired lifestyle, future expenses and life expectancy. Don’t forget to include potential health care costs and the impact of inflation, both of which are often underestimated. You can then begin to estimate how much you’ll need to save.
  2. How am I progressing toward my goal? While you’ll want to work with your financial advisor to determine whether you’re on track to meet your goals, these general ranges give you an idea of where your savings should be, based on your age and income.
  3. Which actions can I take today? If you’re behind on retirement savings, now is the time to catch up. Explore ways to ramp up your savings, such as increasing your contributions or taking advantage of catch-up contributions if you’re eligible.

Pitfall No. 3: Making poor investment decisions

How you choose to invest is a key ingredient to the success of your retirement savings journey. Missteps along the way are unfortunately all too common.

Some people play it too safe, avoiding the stock market altogether. Others take on excessive risk in their portfolio, hoping for quick gains to make up for insufficient savings.

Making investment decisions that don’t align with your goals can inhibit your ability to achieve them. Overly conservative investments, such as keeping all your money in bonds or cash, may not keep pace with inflation, eroding your purchasing power over time.

The following chart shows that the difference between a 6% and a 3% return is not just 3% — it could be nearly $500,000 less in retirement savings.

Conversely, taking excessive risk in your portfolio or not properly diversifying your investments can lead to significant losses. Reacting to short-term market fluctuations can also disrupt your portfolio’s potential for growth.

Chart showing potential benefits of growth in your portfolio Source: Edward Jones estimates. Assumes saving $700 per month. This hypothetical example is for illustrative purposes and does not reflect the performance of a specific investment. Values rounded to the nearest $5,000.

How to avoid this pitfall

  1. Build a portfolio with purpose. Your goals, comfort with risk and time horizon are key factors in determining the ideal mix of stocks, bonds and cash you should hold in your portfolio. Typically, the longer you have until retirement, the more risk you can take with your investments. As you near retirement — and have less time to recover from potential market downturns — your portfolio should become more balanced between stocks and bonds.
  2. Diversify your portfolio. You’ve heard the expression, “Don’t put all your eggs in one basket.” This principle also applies to your investment portfolio. A diversified portfolio that spreads your money across multiple investments can help ensure your retirement strategy is built to last, especially through inevitable periods of market volatility.
  3. Maintain discipline. Market volatility can be unsettling, but overreacting to it might jeopardize your ability to meet your retirement goals. Stay disciplined by remaining focused on your goals — they’re your purpose for investing. It’s also important to review your portfolio regularly with your financial advisor to ensure it’s aligned with your goals and rebalance as needed.

How Edward Jones can help

Avoiding these common pitfalls can help make a difference in your retirement savings journey and, ultimately, your financial security in retirement. The earlier you start and the more intentional you are about your approach, the better positioned you can be to achieve your retirement goals.

Your personal situation will dictate the right approach for you, which is why we recommend working with your financial advisor to help ensure you are on the right track.