5 mistakes that can lengthen the road to retirement

By Lisa Rabasca Roepe

For many Americans, their 401(k) balance is a sobering reminder that good intentions don’t always lead to good outcomes.

Perhaps you intended to increase your retirement savings each year, but you instead upgraded to a nicer car when you were promoted. Or you charged family vacations to your credit card but never paid them off. Maybe you borrowed from your account to pay for home repairs because you didn’t have an emergency fund.

The result: Instead of the recommended six times your annual salary in a retirement fund by age 50, you have less than $100,000 and fewer than 20 years to finance what could be a decades-long retirement.

In fact, nearly 60% of savers worry that they aren’t putting aside enough money, according to a 2024 Bankrate study. And in a 2024 AARP study, about one-quarter of U.S. adults over the age of 50 who are not yet retired said they would never be able to.

While 73% of private-sector and state and local government employees have access to an employer-sponsored retirement plan, just 56% participate, according to the U.S. Bureau of Labor Statistics. And many people who do sometimes cut back or stop their contributions to offset inflation and unexpected expenses — or when there is uncertainty in the markets.

Experts have identified five common habits that sabotage retirement savings, all stemming from our tendency to choose immediate gratification. Here’s a closer look at these money missteps and practical strategies to overcome them.

1. Increasing your spending

As we make more, we tend to spend more, as our perception of our wealth changes: We think we have more than we do.

“It’s a much harder transition to start saving versus spending more when we get a raise,” said Dana J. Menard, founder of Twin Cities Wealth Strategies, in Maple Grove, Minnesota. If you want to fend off lifestyle creep, make a plan to use a portion of your raise to increase savings or pay down debt before extra money hits your account, he said.

Ariana Alisjahbana, a lead adviser with North Berkeley Wealth Management in California, suggests setting up 401(k) contributions to automatically increase 1% or 2% annually.

2. Carrying a balance

Carrying credit card debt, a student loan and an auto loan can overwhelm borrowers, leading them to make only the minimum monthly payment. Most consumers don’t realize that the minimum payment on a card barely covers the interest rate charges, Menard said, which on average currently range from 21.16% to 22.73%.

“If you keep paying the minimum, the chances are you’re never going to pay that balance off,” he said.

Getting out of debt becomes even harder when you keep charging items to your credit card.

When it comes to paying down credit card debt, there are two primary strategies. The mathematically optimal approach is to focus on the card with the highest interest rate first, in order to minimize the total interest paid over time. However, Menard recommends paying off the card with the smallest balance first, because it provides a psychological win that can motivate people to continue.

3. Not tracking the small stuff

The average consumer spends $118 a month on food delivery and $78 a month at coffee shops, according to a 2023 survey of 1,000 U.S. adults by Empower, a financial services firm.

When we think about expenses, we often focus on big-ticket items like our rent or mortgage, grocery bills, and car and student loan payments, but smaller convenience costs can add up quickly. If you’re looking for ways to save, these minor expenses are a good place to start.

Each month, review your spending by listing all expenses on a spreadsheet, said Melissa Caro, the founder of My Retirement Network, a New York media company. Track every expense, from daily coffee and takeout to major bills like rent or mortgage, insurance and utilities. Don’t overlook streaming subscriptions, cellphone plans or groceries, and be on the lookout for cheaper alternatives.

4. Failing to plan for emergencies

Everyone needs an emergency fund, even if you’re living with your parents or renting. An emergency fund acts as a buffer against unexpected job loss, medical bills and car repairs.

Without one, we’re more likely to withdraw funds from our retirement account, incurring penalties and losing compound growth, said Melinda Satterlee, the founder of Marathon Wealth Management in Medina, Washington. Too often people don’t consider the downside of borrowing from a 401(k) plan.

“They think, ‘This is money I’m saving. I can access it,’ but they’re not told how much that will cost them,” she said.

For instance, if you withdraw $5,000 from your 401(k) before turning 59.5, the IRS will impose a 10% penalty of $500. Assuming a 22% marginal tax rate, you would owe an additional $1,100 in taxes on the withdrawal. In total you would pay $1,600 in fees, netting you only $3,400.

5. Spending windfalls

A bonus or a tax refund is a painless way to build up an emergency fund or pay down debt.

Each year, create a “windfall plan” that outlines exactly how you’ll allocate any unexpected income, Alisjahbana said. Document specific percentages to be used for debt reduction, emergency savings and possibly a small splurge. Having a strategy prevents impulsive decisions and protects your long-term goals.

If you don’t have a plan and receive unexpected income, wait 30 days before deciding how to use it, Alisjahbana said. One of her clients recently received a sizable court settlement but lacked a windfall plan. After the recommended 30-day wait, the client decided to put most of the funds into her children’s 529 accounts for their education.