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3 Retirement Savings Mistakes You're Probably Making

Christy Bieber, The Motley Fool

Retirement: It should be a time to kick back, relax, and enjoy the fruits of your labor. Unfortunately, if you haven't planned properly, your later years will instead be spent struggling to stretch your limited dollars. 

Too many Americans are woefully unprepared for retirement, and savings missteps throughout your life can come back to haunt you when it's finally time to leave the working world. Making bad choices today can leave you broke as a retiree, so make sure you aren't making these three big retirement savings mistakes. 

Older couple looking at financial paperwork.

Image source: Getty Images.

1. Not saving enough

One in five working Americans is saving nothing for retirement, and more than 50% of Americans save less than 10% of their annual income for all financial goals, including retirement and emergency funds, according to a recent Bankrate.com survey. Just 10% of Americans said they save between 11% and 15% of their income, and just 16% said they save more than 15% of what they earn.

Common financial wisdom says you need to save at least 10% of income for retirement, but this isn't really enough thanks to rising costs, longer life spans, and the fact that projected future returns are lower for today's investors. Instead, those in the working world today should aim to put aside around 15% to 20% of income for retirement, but this includes any employer match you receive in a company 401(k) so if you're lucky enough to get a match, you don't have to go it alone.

Saving 15% of income is really hard, especially if you're hardly saving anything right now. Levling up to 15% may require big changes which could include asking for a raise, working for a promotion, taking on a side job, joining the gig econonmy, driving a used car instead of a new one, downsizing to a smaller house, or moving to a lower cost area. But if you're willing to make some sacrifices now, you won't have to spend the last few decades of your life struggling to survive. Anything you can do to increase your earnings today will boost your eventual Social Security benefits -- an important income source for retirees.

2. Not paying attention to fees

It's rare to find totally free investments. Usually, you'll pay an up-front commission or fee to buy and sell assets. And depending what you invest in, a whole host of additional fees could be charged, including operating or management fees.

Over time, these fees take a big bite out of your projected returns. Say, for example, you invest $5,500 annually in an Individual Retirement Account (IRA) from age 25 to age 65, earning a 7% return over time.  If you paid a 1% fee on all your investments, you'd end up with $851,190.81 -- but if you paid a 3% fee, you'd have just $522,640.34. In the latter example, the fees you paid would've cost you $328,550.47 and you would have had to invest $3,457.50 more every single year to make up for the lost funds. 

It's hard enough for most people to find sufficient cash for retirement savings. There's no reason to make amassing a nest egg even more difficult. Instead, look for low-cost index funds to invest in, and pay close attention to 401(k) fees. If your plan is expensive to participate in, contribute only enough to earn the employer match and put the rest of your funds into an IRA, where you can choose to invest in cheaper assets. 

3. Failing to plan for healthcare costs

Based on life expectancy estimates, Fidelity recently projected a senior couple aged 65 would need around $280,000 to cover the costs of healthcare they'll incur over the rest of their lives. 

If you don't have dedicated savings to cover healthcare as a senior, chances are good you'll deplete your 401(k) or other retirement investments too quickly, because so much money will go toward that expense. And big healthcare expenses are most likely to be incurred late in retirement when funds may already be running short. 

Investing in a health savings account (HSA) can help you cover medical costs if you leave the funds invested until retirement. HSAs are only available to people with high-deductible healthcare plans. If you contribute to one, you can take a tax deduction for contributions up to annual limits, and you can withdraw funds tax-free to pay for care. While many people with HSAs withdraw funds as they incur ongoing healthcare costs, leaving the money invested to grow and cover care as a senior could be a better bet. These funds never expire, so you can save them for future healthcare costs in retirement.

Unfortunately, not everyone is eligible to contribute to an HSA, because you need a qualifying high-deductible insurance plan. If you can't contribute to an HSA, increase your savings in other tax-advantaged accounts to set aside additional money for healthcare. To amass $280,000 for healthcare by age 65, you'd need to save an additional $155 per month if you start at age 30, retire at 65, and earn a 7% annual return on investment.  

Don't let these mistakes derail your retirement

You can't afford to underestimate your retirement savings needs, healthcare costs, or the impact of fees on investments -- at least not if you want to be comfortable during your senior years. Make sure you're putting aside at least 15% of your income -- plus some dedicated funds for healthcare -- and watch your investment fees.

If you do all this, you'll be very glad you made the effort when you're enjoying life as a retiree. 

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