When retirement is decades away, it can be hard to take the need to prepare seriously. The early days of one’s career tend to be consumed by more immediate concerns: career advancement, getting your own place, starting a family, and so on. But it’s often the early part of your career that sets the tone for your financial behavior throughout your working years. Long before we retire, we develop good money habits and bad.
Catching common financial missteps as early as possible can have a profound impact on how comfortable your retirement will be. Here are four traps to avoid falling into.
Not saving enough for retirement
It’s important to have a retirement savings plan so you know how much you’ll need in retirement and therefore how much you need to save each month to get there. If you’re setting aside just 5% or so of your pay every month, for instance, that’s almost guaranteed to be too little to fund your retirement. And if you’re within a decade or less of retirement, it’s even more important to figure out how much you need to save and start saving it. If you’ve waited this long to “run the numbers,” you may face more of a challenge to save enough, but it’s definitely possible to do so. This handy calculator can help you pin down your savings goal.
You also can’t just park your retirement savings in a bank account: The interest rates paid on even the best savings account won’t be enough to beat inflation, let alone grow your capital sufficiently. Those funds should be invested, preferably in an account designed for retirement savings such as a traditional or Roth IRA. Such accounts offer substantial tax benefits that can help your savings grow faster and last longer once you’re living off them.
Carrying a lot of debt
If you’re making a good salary, you may feel perfectly comfortable carrying a large load of debt because you have no trouble making your payments every month. However, that debt load will get a lot more crushing once you stop working and are no longer enjoying a high income. Ideally, by the time you retire, you should have zero debt — which includes owning a paid-off house. In that situation you can live quite comfortably on a small income, which means you don’t need to save nearly as much in the years leading up to retirement. If you have a lot of debt, start paying it down today no matter…