The Top 3 Mistakes People Make When Saving for Retirement

By overcoming these three potential challenges, you could boost your retirement savings.

Planning for retirement is never an easy task. After all, it always seems like such a distant event. It is therefore difficult to put in place the required capital and decision-making process in order to generate a nest egg that provides a financially-free retirement.

With that in mind, here are three common mistakes that people making when seeking to build their retirement savings. Avoiding them may make it a lot simpler to retire with a comfortable income which provides the financial flexibility most people seek in older age.

Wrong assets

While saving for retirement is tough, knowing where to invest it could be even more difficult. Put simply, many people invest in the wrong assets throughout their lives, and this can hurt their returns in the long run.

During the accumulation phase of an individual’s life, the vast majority of savings should be invested in a stock market, such as the FTSE 100 or S&P 500. This is because there is time for a potential downturn to recover before an individual reaches retirement age. And since retirement funds are not needed until age 65+, volatility is unlikely to be an issue, either.

However, many people choose to keep large amounts of cash savings, or invest in assets such as bonds throughout their lives. While they may offer lower risk and less volatility than stocks, ultimately they are unlikely to provide a sizeable nest egg in older age.

Inflation

Given the long-term time horizon involved in planning for retirement, it is easy to overlook the impact of inflation. In other words, what seems to be a sufficient amount on which to retire today is unlikely to be enough in 20+ years. Assuming inflation of 3% per annum, over a 20-year timeframe inflation could erode the value of an asset by as much as 80%. This means that obtaining a return which is in excess of inflation is vital to people planning for retirement, and also for those individuals who have already retired.

With stock markets such as the S&P 500 and FTSE 100 offering high-single digit returns on an annualised basis over the long run, they could help an investor’s portfolio to stay ahead of inflation.

Long-term approach

While retirement savings are not accessed until an individual has retired, many investors worry about the performance of their portfolios in the short run. This can lead to poor decision-making, since it can force an investor to give up on assets that could deliver high returns in the long run.

In fact, it could be argued that falling asset prices are a good thing for individuals who are not yet retired. After all, they provide an opportunity to purchase the same asset at a lower price. And since individuals are net buyers pre-retirement, it could mean that their long-term returns are given a boost. As such, taking a long-term approach could be a sound method of overcoming paper losses and planning for a financially-successful retirement.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

woman looks out at horizon
Investing

Is Sun Life Financial Stock a Buy for its 4% Dividend Yield?

Let's dive into whether Sun Life Financial (TSX:SLF) stock is a buy for its dividend yield alone, or if this…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

1 Magnificent Energy Stock Down 17% to Buy and Hold Forever

Down over 17% from all-time highs, Headwater Exploration is a TSX energy stock that offers you a tasty dividend yield…

Read more »

Man data analyze
Investing

Want $1 Million in Retirement? 2 Simple Index Funds to Buy and Hold for Decades

Just invest in a S&P 500 index fund and do nothing.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 21

Escalating geopolitical tensions and U.S. economic data remain on investors’ radar today as the TSX continues to hover above the…

Read more »

think thought consider
Investing

Should You Buy Couche-Tard Stock Aggressively Before Nov. 25?

Here’s what could help Couche-Tard stock rebound after its upcoming earnings event.

Read more »

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »

oil and natural gas
Investing

Is Imperial Oil Stock a Buy for its 2.3% Dividend Yield?

Imperial Oil (TSX:IMO) stock: A century of dividends, 30 years of growth, and a 2.3% yield that could evolve into…

Read more »