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4 savings mistakes 20-somethings should avoid at all costs
(Flickr / Chris JL) Don't sabotage your future. According to Christine Romans, CNN chief business correspondent and author of the upcoming book "Smart is the New Rich: Money Guide for Millennials," it's easy for even the best-intentioned young people to go wrong with their retirement savings.
"Now that the economy is beginning to heal, smart investors need to be extra careful not to sabotage their retirement planning themselves," she writes.
Here are the four moves Romans advises all 20-somethings to avoid.
1. Ignoring your 401(k)
Romans points out that in order to continually have your money working for you, you shouldn't enroll in your 401(k) and then never look at it again. Instead, you should be reallocating your assets on a half-yearly or yearly basis.
"By not reallocating your assets periodically, you risk getting off track from the right asset allocation for you," Romans writes. "A young person should have more stocks and fewer bonds than someone approaching retirement."
To figure out what mix is right for you, try a simple formula based on your age. If you don't have a 401(k) but are saving in an IRA, you'll want to be similarly attentive.
2. Underestimating health care costs
It's easy to write off health care costs when you're young and healthy, Romans says, and underestimate how much money you'll ultimately need.
But, according to the author, Medicare and Social Security won't completely cover things like nursing homes and assisted living. She cites a statistic from Fidelity Investments which says you'll likely need a whopping $250,000 in addition to your retirement savings for health expenses in post-work years.
"You will spend vastly more money on health care in the last two years of your life than during the rest of your life combined," Romans writes. Instead of getting complacent with your current savings method, remember: You'll probably need more than you think.
3. Starting too late
Romans strongly suggests starting to save as early as possible, since "the most important advantage you have is time." She also brings up the "miracle of compound interest," which allows your savings to grow exponentially over time.
"Two thousand dollars saved in your 20s is more valuable than $10,000 saved in your 50s," Romans writes. "... Using the historical rate of stock market return, that $2,000 in your 20s grows to more than $20,000 by the time you retire. Invest five times that in your 50s, and it is worth less than $18,000 on retirement."
4. Cashing out your savings early
However tempting it may be when you're young to cash out the few thousand dollars you have in your 401(k) (or IRA), Romans strongly advises against it. "The $5,000 cashed out at age 25 is $75,000 of retirement savings you have sabotaged," Romans writes. "... And cashing it out means taxes and a 10% penalty. So pulling out $5,000 means you'll take home half of that and rob yourself of tens of thousands of future retirement dollars."
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