Retirement saving is an important part of financial planning, and it is essential to avoid common pitfalls to ensure that you can comfortably retire when the time comes. In this article we will consider a few of these common mistakes to ensure you know how to responsibly manage your retirement savings and what to be on the lookout for throughout your accumulation years.
Not Starting Early Enough
One of the biggest pitfalls that individuals can make when it comes to retirement saving is not starting early enough. Many individuals delay saving for retirement, thinking that they have plenty of time to catch up. However, the power of compounding means that the earlier you start saving, the more time your money has to grow. Starting early also means that you can take advantage of tax incentives and employer-matching contributions, which can significantly boost your retirement savings.
Not Saving Enough
Another common pitfall is not saving enough. Many individuals underestimate how much they will need when they retire and do not save enough to meet their goals. It is also important to point out here that with advances in the medical world, many people are living longer meaning that the money saved towards retirement will have to last for longer than it did a few decades ago.
It is important to calculate how much you will need to save to maintain your desired standard of living in retirement and to make sure that you are contributing enough to your retirement savings account. It might be worth doing this exercise with a financial adviser since they can help you calculate the value of your future needs by taking into consideration factors such as inflation.
As part of this consideration, it is also important to point out that it is strongly advised to not be tempted to withdraw any funds from savings products before you retire, unless it is absolutely necessary. Although there is the possibility in certain circumstances to withdraw some of the funds invested from retirement products before retiring, it does not only have tax consequences when you do retire, but it also limits the compounding effect these funds can have towards your retirement goals.
Not Managing the Risk in Your Retirement Products
Saving for retirement is a long-term goal and therefore it does carry the risk that inflation can erode the value of your savings over the years if it is growing at a rate below the long-term inflation rate. The most effective way of managing this inflation risk is by increasing the risk exposure within the product especially during your younger years when you start saving towards retirement. Although Regulation 28 of the Pension Fund’s Act does limit the extent to which retirement funds may invest in particular asset classes, there are retirement funds that follow a more aggressive investment approach by allocating a high percentage of the fund’s capital towards equities. Ensuring that your retirement products are invested in higher risk investments while you still have many years to save towards retirement means that it will grow at a rate above that of inflation.
Not Seeking Professional Advice
Another common pitfall is not seeking professional advice. Retirement planning can be complex since it requires an understanding of the tax implications of various products before and after retirement as well as an understanding of markets to ensure the funds are invested appropriately. As explained earlier a financial adviser will also be able to sit down with you to determine your circumstances, needs and goals and help you put together a realistic strategy to meet them which will include complex time value of money calculations. Financial advisers will also assist you in avoiding many of these pitfalls mentioned to ensure you can indeed retire comfortably when the time comes.
Secure Your Future
Saving for your retirement is one of the most important parts of financial planning and although there are several pitfalls that individuals should be aware of there are also approaches that can be followed to avoid them. Unfortunately, we can’t only start thinking of retirement later in life and having a clear understanding of your own retirement needs, with a clearly planned strategy, is one of the best things you can do for your future self.
