Not saving enough
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When it comes to saving and investing for retirement, wisdom is wasted on the aged. It’s the young who need some help.
Unfortunately 401(k) plan participants in their 20s and 30s are making a
number of mistakes with their savings and investments — and what seem
like small mistakes when you’re young can have big consequences later in
life.
Not saving
The first big mistake is that some young workers aren’t contributing to
their 401(k) plan at all. According to a Vanguard Group report, How America Saves 2013: A report on Vanguard 2012 defined contribution plan data
, only four in 10 workers under the age of 25 and just six in 10 workers
ages 25-34 contribute to their employer-sponsored retirement plan. By
contrast, 74% of those ages 55–64 contribute to their 401(k).
“They (young workers) are failing to essentially pay themselves first,”
said Tom Balcom, founder of 1650 Wealth Management, a financial planning
firm based in Fort Lauderdale, Fla.
Not saving enough
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The second mistake is this: young workers who do defer a portion of
their compensation into their employer-sponsored retirement plan aren’t
saving enough to get their company match.
Consider: Workers under age 25 contribute on average 4.3% of their
salary to their 401(k) plan, according to the Vanguard report.
Meanwhile, those ages 25 to 34 contribute 5.5%; ages 35 to 44, 6.4%;
ages 45 to 54, 7.4%; ages 55 to 64, 8.7%; and 65-plus, 10%.
Employer matching contributions vary, but a typical formula is for a
company to contribute 50 cents for every dollar an employee contributes
up to 6% of their pay. So by contributing less than 6%, Balcom said,
workers under age 35 are, in essence, failing to take full advantage of
the company match, “which is ‘free’ money and the only guarantee of a
100% gain on the money that is matched.”
In other words, young workers who increase the percent of the salary
they save by one or two percentage points could greatly improve their
odds of being able to retire in comfort someday.
Others share this opinion about the biggest mistakes that young workers
make when saving and investing for retirement. “The biggest mistake I
see young investors make is not keeping a long-term perspective,” said
Troy Redstone, president of retirement services at PHD Retirement
Consultants, an Overland Park, Kan. consulting firm. “They have trouble
picturing themselves in the future and they minimize the importance of
saving for that unknown future. They mistakenly believe they have all
the time in the world and they just don’t take savings seriously.”
In behavioral finance, Redstone said, this is called the “tangibility
gap,” where the intangible future is not bridged with the immediate
concerns of today. “There are other mistakes they make, but it generally
boils down to not saving enough soon enough,” Redstone said. “It really
makes it difficult to catch up later.”
Not saving to the max
Drew Bottaro, a vice president and senior financial counselor with
Weston Financial Group, a financial planning firm based in Wellesley,
Mass. said younger workers are making a mistake by not saving the
maximum possible in their 401(k)
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