Go to the ant, you slacker! Observe its ways and become wise. Without leader, administrator, or ruler, it prepares its provisions in summer; it gathers its food during harvest. – Proverbs 6:6-8
It is wise to save for future needs. Unfortunately, 66% of Millennials have not started saving for retirement. But instead of focusing on the 66%, let’s turn our attention to the 34%.
First of all, if you are in the minority of Millennials who have started saving for retirement, well done. These are some of the most critical years for your retirement savings. To take advantage of compounding, you need time. And so now is the time to save.
However, many 20 and 30-year-olds who are saving for retirement are still making some costly mistakes. Here are a few of them:
- They are not investing enough. Three percent of your gross (before taxes) income is not going to be enough. The Center for Retirement at Boston College has extensively researched the amount individuals need to save for retirement. And their number is 15%. They recommend placing 15% of your gross income into your retirement savings. Therefore, if you are not at that 15% mark, it’s time to ramp it up.
- Their investments are too conservative. These are the years when your investments should be more aggressive. You have time to weather the ups and downs of the market (and there will be both). Many young adults are missing out on large gains in their retirement portfolio because their investments are way too conservative. There is a time for conservative investing, but that time is not now for those in their 20s and 30s.
- Their investments are not diversified. I have met many young adults whose investments consists of a few handpicked stocks, selected because the individual simply felt good about the stock. You need to be aggressive in your investments, but portfolio of a few individual stocks is too risky. Diversify your holdings by leveraging index and mutual funds. By doing do so, you can invest in hundreds of stocks that are picked by financial professionals.
- They are too worried about the market. Obsessing over the market will only bring about stress and timidity. Those who constantly worry about the market often pull back on their investing. When they finally feel good about the marketing, primarily because it has performed well for a long period of time, they buy at its high point. And then the market goes down and the reason for their timidity is confirmed. Break the cycle by automatically investing every pay period and avoid the hourly market check-in.
If you are in your 20s and 30s and are investing, well done. Keep it up. And avoid the above mistakes to better prepare yourself for the retirement years.