So you say you're already contributing to a 401(k) or some other type of retirement account? Congratulations -- you're working on making your future self very happy. That's because the secret to retirement savings is that you can't make up for lost time.
And if you're making progress, you want to make sure that you're doing retirement right ... right? Knowing just how much to save is one of the hardest financial challenges there is. You might try a calculator, or talk to a financial planner to figure out your big picture.
In the meantime, you should avoid missteps that might crack your nest egg. That's why we asked several certified financial planners to pinpoint common pitfalls they -- and how you might avoid them.
1. Having No Clue How Much You Need to Save for Retirement
More than half of Americans haven't calculated how much they'll need to save for retirement, according to the 2014 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. But in much the same way you should have a figure in mind when you're saving for a car or house, knowing your long-term retirement goal can help you figure out a savings plan to reach it.
Seeing such a large number may feel overwhelming, but it could also light a fire under you too. "If you see you need $2 million for retirement, that could jump-start savings," says Kevin O'Reilly, principal of Foothills Financial Planning in Phoenix. Just remember that you do have compound growth to help you build your investment -- and the younger you are, the more time is on your side.
An online retirement calculator can help give you an idea of the amount you may need in retirement, based on factors like how much you have saved so far and various estimated expenses. Just be honest and meticulous when entering the information, or else it's "garbage in, garbage out," cautions Erika Safran, founder of Safran Wealth Advisors in New York.
Many retirement calculators use a replacement ratio when doing their calculations, which is simply the percentage of your current income that you think you'll need to have for retirement. An 85 percent replacement ratio is a good rule of thumb.
2. Having No Clue How Much You Might Spend in Retirement
Do you keep a budget? If you don't know where your money goes today, you may be more clueless about where it could go in the future. "I think it's a good idea even prior to retirement to keep a log of spending," O'Reilly says. "I get people who have no idea what they're spending on daily expenses."
The LearnVest Money Center can help you keep tabs on your spending because it records and categorizes your daily financial transactions. If you'd prefer to use old pen and paper, write down every regular expenditure you have, including dining, groceries, utilities, clothing, car maintenance and fuel, entertainment, your children's needs, medical bills, travel and your mortgage. The more you can track, the better.
Then go through that list and try to predict which of those costs might increase and decrease in retirement. For example, you may have your mortgage paid off by the time you retire, and smaller costs, like regular dry cleaning for work attire, could shrink significantly. On the flip side, maybe you'll travel more after you're done working, or spend more time on the golf course. The sum of these costs can help give you an idea of how much you'll be spending in the future.
Don't forget to factor in inflation, and consider some real-time experimentation. "I've seen people test-drive their [projected retirement] budget for a while before retirement, to make sure it's realistic," says Joseph Hearn, vice president of Teckmeyer Financial Services in Omaha and author of the Intentional Retirement blog.
3. Underestimating the Cost of Health Care
Only 36 percent of Americans have thought about how much they'll need for health-related expenses in retirement, according to AARP's 2013 Health Care Costs Survey. And why should they worry -- won't Medicare take care of those bills once they turn 65?
Not so fast. Research by Fidelity shows that a 65-year-old couple retiring in 2013 will need approximately $220,000 to cover medical bills throughout their retirement -- beyond whatever Medicare pays for. Most dental care costs and eye examinations, for example, are not covered by Medicare. And most importantly, the government won't foot the bill for long-term care -- and the median annual cost of a private nursing home room is nearly $84,000.
AARP's health care costs calculator lets you plug in data such as your age, weight and information about health issues, and estimates out-of-pocket expenses you'll incur after you retire.
4. Responding Rashly to Market Volatility
When the economic weather grows stormy, it may seem natural to distrust the markets and dash to the nearest safe money harbor. "The mistake people make is to convert [some of their 401(k) holdings] to cash" during a crisis, says Safran. "But cash doesn't provide any growth."
O'Reilly recalls a client who insisted on sitting on a fortune in cash because of the 2008 crash but missed out on the resurgence that followed. "That particular decision has probably cost him several hundred thousand dollars," he says. "Many people sold their stock after the crash and guaranteed losses by never getting back in the market to enjoy the gains. They bought high and sold low."
5. Not Being Truly Diversified
One of the best protections against market volatility is diversification. The three basic asset classes within a retirement portfolio are stocks, bonds and cash. But more diversity is often better.
You may have stocks spanning a variety of sectors -- technology, health care and financial services, for instance -- but if all those are U.S.-based stocks, you're not as diversified as you think. If you're not sure how to allocate your portfolio, talking to a financial planner can help. For an example of asset allocation, see this sample portfolio from LearnVest's Start Investing bootcamp.
6. Ignoring Fees
The financial institutions that handle 401(k)s for employers often charge a fee, sometimes called an expense ratio, to cover such things as administrative costs, customer service and online transactions. Some take a flat fee, while others take a percentage of a given account. Either way, how much the fee adds up to -- as well as its very existence -- often puzzles retirement savers. "Finding out what the fee is can be hard to tackle," O'Reilly says.
A general rule is to look for low-cost index funds in a retirement account, because these fees typically fall between 0.1 percent and 0.2 percent. O'Reilly believes that a fee of up to 0.5 percent is reasonable. You may have to dig for the fine print to figure out what you're paying.
And if you're not afraid to rock the boat a little, you can try broader action to make sure you're not being gouged by these administrative costs. "Employees who don't like the 401(k) fees they see can mention it to their employer and see if [the company] wants to change the plan," Hearn says.