From bad investments to the wrong savings accounts, Americans can take various missteps when planning for retirement.
But so many fall victim to one mistake in particular, according to one expert.
"Every client that I have wishes that they started earlier," Katharine George, a financial adviser at Wealthstream Advisors, said during an appearance on Yahoo Finance Live . "Compounding — so that means starting very early and having your money grow, that is the most powerful tool."
Here's why starting early matters. According to the government's compound interest calculator, with an initial investment of $20 and a monthly contribution of $40, investors could make more than $38,000 in 30 years, assuming a 6% rate of return with 3% variance.
“Wishing they'd started saving earlier and more often is a regret many investors face," said Randy Bruns, founder of financial planning company Model Wealth. "The issue is that when you have one of the most important scenarios for building wealth — [number of] years for compounding — is also when you have the least financial capital."
When it comes to calculating the ideal "retirement number," George said things can get complicated. She explained that the right number can depend heavily on factors such as an individual's risk profile, their stocks-to-bonds mix, and living expenses. She noted that healthcare costs grow at a higher rate than other living expenses.
"There are all sorts of rules of thumb out there. And I don't like any of them. It's really hard because everyone's personal situation is very different," she said.
George said that Americans should make sure not only to plan early on but also advised them to check in with a professional 5-10 years before retiring. She explained that a financial planner might tell them they need to save more than they think, when they still have time to adapt accordingly.
"So really working with a professional who has the knowledge base as to how to grow your assets, how to think about inflation, and how you're going to supplement your lifestyle even from a tax standpoint. You know, money in a retirement account is very different than money in a taxable account from taxes," she said.
Investors who wait too long to prepare for retirement risk finding themselves obligated to work when they’re too old, said Jordan Benold from Benold Financial Planning.
"Work at some level is not only mental but physical in nature. There will come a time when your body cannot do the things it used to do, and having a nest egg to fall back on for income is vitally important," he said. "Time is the best asset anyone investing can have. It is almost the only guaranteed way to have the correct amount in retirement that you will need."
Waiting too long to plan for retirement could mean enduring a massive lifestyle downgrade.
"It's people that hit retirement or are already in retirement that have to make really tough decisions like downsizing their home or reducing expenses that maybe they wish that they had started a bit earlier to plan for," George said. "So really think about having a plan before you hit that retirement age."
If you’re starting late and are still behind, it’s time to course-correct and sacrifice a bit more of your take-home pay for the future, said Peter T. Palion, a financial advisor from East Norwich N.Y.
"If you're starting at let's say 30 or 35…you would probably want to shoot for a somewhat higher level of contribution to make up for the lost time so that, at the end of the day when you arrive at your retirement age, you won't have significantly less money than if you started sooner," Palion said.
In more dire circumstances, older Americans who don’t have enough saved can resort to reverse mortgages or a home equity conversion mortgage line of credit as a possible "lifeboat," said Brandon Gibson from Gibson Wealth Management
"There is some degree of retirement planning that can be done in just about any situation," he said.
But ultimately, nothing beats planning ahead, according to Brandon R. Opre from Trust Tree Financial.
"The plan will evolve and undoubtedly change over time, but you need to have goals and something to work towards," Opre said. "The sooner people create this vision, the better off they tend to be and the more confident they become knowing they've taken steps to save a nest egg that should support them in retirement."
