5 Ways You’re Saving for Retirement Wrong

How much are you saving for retirement each year?

If you haven’t started saving yet, you’re not alone. According to Northwestern Mutual’s 2018 Planning & Progress Study, about 1 in 5 Americans have nothing saved for retirement.

And the average American has $84,821 saved for retirement, which is far less than the $1 million to $1.5 million that’s recommended.

These numbers paint a bleak picture, suggesting many Americans will not have the means to support themselves later in life.

So how can you stay ahead of the curve and support yourself after you’ve stopped working? First, make sure you’re not making any of these retirement savings mistakes.

1. Not having a retirement plan

They say that failing to plan is planning to fail. Although this might not always be the case, it certainly rings true when it comes to saving for retirement. Without a plan in place, it’s impossible to know whether you’re on the right track.

“The major mistake people make is not having a written retirement plan in place at an early age,” said Drew Parker, creator of The Complete Retirement Planner. “You should actually start developing a comprehensive retirement plan as soon as you start working.”

Part of this plan should be to set a retirement savings goal. Since everyone’s lifestyle is different, your target figure should be customized to your unique needs.

Carter Henderson, founder and chief investment officer at Henderson Capital Group, recommended using the “replacement ratio,” or what proportion of your current (or predicted) income you’ll need during retirement.

“To be considered financially secure, meaning you’re not living on a tight budget nor are you spending money on lavish vacations, experts recommend replacing 70% of your former income,” said Henderson. “If you think you’ll cut back in retirement, plan to replace 60%, but if you want to live just like you are living and take some lavish trips, you should save enough to replace 80% to 100% of your former income.”

Once you know your goal, you can use an investment calculator to work backward and figure out how much you must save each year to reach that number.

2. Waiting to save until you’re debt-free

If you’ve got debt (student loans, anyone?), you might put saving for retirement on the back burner until you’ve paid it off. But waiting to save would be a mistake, particularly if you have low-interest debt.

“Not starting to invest regularly as a 20-something is a financial mistake that carries long-term consequences,” said retired professor Timothy Wiedman, who taught a course on retirement planning. “Unfortunately, many young folks divert their disposable income in other directions, believing that they can catch up later after their incomes rise. But that strategy is almost always a big mistake.”

That’s not to say you should ignore your debt, but rather find a balance between debt repayment and saving for retirement. After all, the earlier you start saving, the bigger your nest egg will grow over time.

“The single most determining factor for success in savings for retirement is length of time in the game,” said Matthew Novak, a certified financial planner (CFP) at Integral Wealth Planning. “The power of compounding interest over 30 years is more important than any single investment pick.”

Compound interest is a powerful force over time, so take advantage of it by starting early. Even if you can only set aside a small amount now, you can always increase your contributions over time.

3. Stashing cash in a bank account instead of investing

When we talk about saving for retirement, we’re typically not referring to saving money in a bank account. Even high-yield savings accounts only get around a 1.00% annual return, which won’t amount to much over the long run.

Instead, you should put your money into a retirement savings account, which typically includes a mix of stocks and bonds.

“Out of default, many people put their money into a savings account when they are saving for retirement,” said McCall Robison, who writes about retirement planning for Best Company. “Although it’s good to start saving, putting your money in a savings account isn’t doing you any good in regards to increasing the amount of that money. Instead, you should look into other options that will still give you opportunities to earn interest on your retirement fund.”

If your employer offers a 401(k) or 403(b), go with that. If not, look for a low-fee individual retirement account (IRA), such as one offered by Betterment. Self-employed people and small-business owners might also use a simplified employee pension individual retirement account (SEP IRA).

You also don’t have to limit yourself to one account, especially if you plan to save more than yearly contribution limits allow.

4. Failing to take advantage of tax benefits

Besides giving you a solid return on investment, retirement savings accounts also offer tax benefits.

Traditional IRAs, for instance, let you contribute pretax dollars to your account. You can contribute more upfront while lowering your taxable income, but you will pay taxes when you withdraw the money.

Roth IRAs, on the other hand, involve post-tax dollars, but your future withdrawals aren’t taxable. Roth IRAs can be an especially good choice for young people as they’re likely not in high tax brackets yet.

“The Roth 401(k) makes sense for them because they’ll likely never be in a lower tax bracket again,” said Levi Sanchez, CFP and co-founder of Millennial Wealth. “Over time, they can switch to the traditional 401(k) as their compensation and tax bracket increases.”

If you’re just getting started, learn the differences between traditional and Roth accounts so you can make the best choice for your future.

5. Not maxing out an employer match

In addition to offering a 401(k), some employers will also match a percentage of your contributions. For instance, let’s say you make $50,000 a year and your employer offers a 3% match.

That means your employer will deposit $1,500 in your 401(k) every year as long as you also contribute that much or more. This employer match means you immediately get a 100% return on 3% of your salary.

“Make sure to max out the contributions that your employer is willing to match,” said Robison. “Not matching your company’s contribution is like throwing that offered money into the trash.”

If your employer offers this benefit, try to take full advantage of it. After all, it’s free money that will go straight into your retirement savings.

Start saving today for a financially secure tomorrow

Saving for retirement is hard for a lot of reasons. Between paying rent and paying off loans, you might not have much left over to save.

Plus, it’s hard to limit spending today so you have more money in the future. But even if you can’t set aside 10% or more of your paycheck, every little bit will help.

Remember, the earlier you start, the larger your money will grow over time. By starting small today, you can set yourself up for a financially secure future.

This article originally appeared on Student Loan Hero.