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3 obstacles that stand in the way of retirement savings

One in three American adults has nothing saved for retirement — here's how to change that.

Would you rather have one marshmallow now — or two marshmallows later? It's an iconic scenario made famous by psychologist Walter Mischel, the administrator of the 1960s "marshmallow test" measuring self-control and instant gratification. Most people go for the here and now. Swap out marshmallows with money, and you've got an all-too-common problem for the modern-day: People everywhere feel behind on saving for retirement. In fact, one in three American adults has nothing at all socked away, according to a survey by GOBankingRates. If that hits close to home, never fear. We've laid out some of the biggest obstacles we put in our own way when it comes to retirement saving — plus, how to get past them.

Obstacle: Being too optimistic about the future

Why we do it: It's an ego thing. We tend to think we're different; we're special and that nothing bad will ever happen to us, say Dr. Daniel Crosby, psychologist and president of Nocturne Capital. For example, we're more likely to entertain the idea we'll win the lottery than to think about our chances of divorce, cancer and other negative possibilities. This type of confidence can benefit us in some areas of life, but when it comes to finance — especially long-term savings — it can hurt us in the long run. Many people who are behind on savings think they'll make up for it by working forever, but unexpected events and health concerns can put a wrench in those plans. In a survey by Prudential Retirement of over 20,000 401(k) plan participants, 22 percent said "optimism bias" was their greatest challenge when it comes to retirement savings.

The fix: Aim to compartmentalize your rosy outlook. This type of confidence can insulate your feelings of self-worth and make you happier, but "know it has no place in investing," says Crosby. Block out some time on your calendar to do a "retirement reality check," says Snezana Zlatar, a senior vice president at Prudential Retirement. Use a retirement calculator like this one to see where you stand realistically, and then adjust your savings plan based on the results. And if you don't have a savings plan? It's not too late to make one to get your savings closer to where you'd like them to be. Take full advantage of your workplace retirement plan and any available matching dollars, and automate savings to come directly out of each paycheck. If you don't have a workplace plan, mimic one by automating contributions into an IRA.

Obstacle: Letting emotions reign over your financial decisions

Why we do it: Whether we like it or not, there's an emotional component to every decision we make. That's why research shows that people with serious injuries to the emotional centers of their brain can't make certain decisions, such as which tie to wear or what to have for breakfast in the morning. The kicker: Since fear doesn't affect their decisions, they tend to beat neurotypical people in investment tasks. The lesson here: "None of us should be suckered into thinking we aren't emotional about money — because we absolutely are," says Crosby. The key is to know how to use those emotions to your advantage.

The fix: Instead of letting an emotion like fear or insecurity keep you out of the stock market, flip the switch and use them to keep you aligned with your long-term goals. Research shows that low-income savers who looked at a photo of their children before making a big financial decision saved over 200 percent more than those who didn't. Or, consider values-based investing — putting your money in investments that support causes you believe in — to help you stay the course.(You're less likely to pull money away from funding something you really care about.) And if you're still worried about the markets? Take a quiz to determine your risk tolerance, and then get started with the asset allocation that's right for you. (Many investing platforms offer risk tolerance questionnaires — here are two from Vanguard and Charles Schwab.) "For the average American investor, the risk is not that they're going to lose 25 percent or 30 percent in the stock market," says Crosby. "The risk is that they're not going to compound it fast enough to get to where they want to go."

Obstacle: Procrastinating on saving

Why we do it: In Prudential's survey, 26 percent of respondents said procrastination was their biggest savings challenge. The idea that our brains are wired for short-term thinking plays a big part in this. Humans are about 2.5 times as upset about a loss as we are pleased by a comparably sized gain, says Crosby, and it can be difficult to imagine a gain so far in the future. Plus, the idea of compound interest — and how much of an impact it can have on our bottom lines — can be hard to wrap our minds around.

Good Cents

The fix: Think about what you specifically want your own retirement to look like. Then, in your mind, replace the vague idea of "retirement" with something concrete, like a beach house with a view of the bay, traveling with your partner or having more free time to spend with your family. Every time you think about retirement, picture your goal. Even better, look at it every day on a vision board, whether online (on Pinterest, for example) or on your wall. And if you need to give yourself a serious reality check to get moving? "Get educated about how much of a difference a few years' delay might have on your ability to retire on your own terms," says Zlatar. Play around with a compound interest calculator like this one to see how much you could gain in the long term by starting to save sooner rather than later.

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3 costs that can destroy retirement

Retirement security is a holy grail that many investors chase. A recent AARP survey revealed that 74 percent of private sector workers are anxious about having enough money to live comfortably in retirement.

Although increasing savings may seem like the answer, creating a sustainable retirement strategy is a bit more complex. Investors must also plan for costs that can detract from their portfolio's growth. "Taxes, long-term care and inflation all have the potential to eat away at your retirement savings," says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial in the greater Minneapolis-St. Paul area. "Not planning properly could result in a substantial blow to your portfolio from a sudden need for extended care, or inflation could slowly chip away at your nest egg."

Health care may be the biggest threat. Long-term care poses two problems for retirees. First, the cost can be staggering. Genworth Financial puts the average annual cost of nursing care in a semi-private room at $85,775. Assuming a typical two-and-a-half-year stay, the total bill for end-of-life care easily surpasses $200,000. The second issue is that these expenses don't fall under the Medicare coverage umbrella. Medicaid will pay for long-term care but requires seniors to spend down their assets to qualify.

Long-term care has the potential to be the most devastating to an investor's retirement strategy, says Steven Yager, a financial advisor with Yager & Associates in Northville, Michigan. The root problem is longevity. "People often assume that since their parents or grandparents lived to a certain age, they'll live to a similar age. They then base their retirement plan on this uneducated assumption about their own life expectancy."

Health care can encroach on your retirement security when expectations don't match reality. There are two possible solutions: Self-fund these expenses or invest in long-term care insurance. Self-funding may require you to increase your current savings rate or rethink your overall strategy. For example, you may need to maintain a larger share of stocks to generate growth in your investments for a longer period if you're trying to fill a long-term care funding gap.

Long-term care insurance can cover health care costs while leaving your portfolio intact, but because of their high premiums, these policies may suit some investors better than others. "It comes down to your asset base," says Jason Laux, vice president of Synergy Group in White Oak, Pennsylvania. "For people without a lot of assets, long-term care insurance usually isn't appropriate. For those who are wealthy, it may make more sense to be growing and investing your money."

Investors in the middle, with assets ranging from $350,000 to $1 million, could benefit most from a long-term care policy. Although these investors may not have enough wealth to self-fund, they can afford the higher premiums to avoid the Medicaid spend-down requirement.

Protection from higher prices comes at a cost. Inflation can be detrimental to retirement savings. Research from insurance consultancy LIMRA suggests that a retirement portfolio could lose more than $73,000 in purchasing power from a 2 percent inflation rate. The effects of inflation may be compounded when increases in certain expenses – such as health care – outpace rising prices in general.

Including inflation-hedging investments in your retirement plan offers a measure of protection for your portfolio. Annuities and Treasury inflation-protected securities are two options for taming inflation's effects.

Annuities are designed to provide tax-deferred growth and generate a guaranteed stream of income, which can supplement income from tax-advantaged retirement accounts, taxable investments or Social Security benefits. With TIPS, the principal value of the investment adjusts up or down in tandem with changes in the consumer price index. These investments yield lower returns compared to stocks, but they can be useful by shielding investors against the negative effects of inflation.

While both annuities and TIPS can benefit investors in retirement, there are some downsides to consider, says Joy Kenefick, managing director of investments with Wells Fargo Advisors in Charlotte, North Carolina. Annuities can offer guaranteed income or guaranteed protection in volatile or declining markets, but the expenses, complexity and lack of liquidity may make them a less than perfect fit for your investment needs.

TIPs, by comparison, offer modest returns in exchange for protection against market volatility and inflation. The benefit they offer comes at the cost of performance and growth, Kenefick says. Before buying into either one, assess the value and purpose of these investments for your retirement strategy.

Diversification should address this overlooked risk. Many investors diversify their assets for risk but not for taxes, Laux says. "They funnel the majority of their investments into pre-tax accounts and are told they'll be in a lower tax bracket when they retire but often don't find that to be true." Without tax diversification, he says, you could end up paying the maximum taxes on all your retirement assets.

Creating tax diversification begins with knowing what you've invested in and where those investments are held. Tax-inefficient investments, such as bonds, belong in tax-deferred accounts, while tax-efficient vehicles, like stock index funds, should be held in taxable accounts. Growth stocks can be used in a 401(k) or similar account to capitalize on the compounding benefit of tax deferral, says Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Florida.

Minimizing the tax bite on your investments becomes even more important when you begin withdrawing money from those accounts. "The way in which an investor harvests from their portfolio is more consequential than the way one saves," Kenefick says. Investors should tap non-qualified accounts first, she says, leaving tax-sheltered accounts to compound and avoid "the eroding effects of paying taxes for as long as possible."

Calculating your target withdrawal rate accurately also matters. Daniel Prince, head of product consulting for BlackRock's iShares U.S. wealth advisory business, says an optimal withdrawal strategy requires retirees to be accurate on both sides of the ledger. Retirees should be realistic about their income and assets, and balance that against their spending. "Taxes will always be a cost," Prince says, but between long-term care and inflation, it's the easiest of the three to proactively reduce.

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How to clear all your debts in 2018

Millions of Brits overspend at Christmas, leaving them in financial difficulty come the New Year.

In fact, a whopping 7.9 million people in the UK will struggle to pay their bills this month after an excessive festive period, according to the debt charity Money Advice Trust (MAT).

Severe debt isn’t just a financial problem either. The stress of owing money can lead to mental health issues and relationship breakdowns, according to charity Mind.

If your new year’s resolution is to be better with money in 2018, Money Saving Expert Martin Lewis can help you alleviate your debt.

The 45-year-old has already revealed the best bank accounts for interest rates on savings, but in his most recent Money Tips newsletter he revealed some key tips for cutting the cost of debt this year.

Here are five simple steps to help you pay off your debt quicker:

1. Stop borrowing money

It can be easy to get into a downward spiral with debt, but you need to stop borrowing money.

Only pay back what you can afford each month or you’ll make the situation worse in the long-run.

2. Identify which debts need paying off first

Start paying off the debts with the highest interest rates first.

"Use all spare cash to clear it and just pay the minimum on everything else. Once it's clear, focus on the next costliest,” said Martin.

3. Cut credit card costs

If you’re currently paying interest on your credit card look for a better option. You will have to pay a fee to transfer the debt, but it will be cheaper than paying the interest in the long-run.

Martin recommends swapping to either a Barclaycard or MBNA card to get the longest 0% interest period.

Barclaycard

Offers 38 months with 0% interest and they offer a low fee to shift your debt.

MBNA

They also offer a 38-month 0% periods, but a slightly higher fee to transfer your debt.

Cut overdraft costs to 0% (and make some extra cash doing it)

Martin reveals two key options when it comes to cutting your overdraft payments:

·         Switch to a 0% overdraft

First Direct offer a 0% overdraft of up to £250 and they also give you £125 to switch to the account.

Nationwide Flexdirect 0% overdraft is much bigger, but depends on your credit score. It only lasts a year, so you’d need to have it payed off by then or consider swapping again.

If you've a friend who already has a nationwide account, you both get £100 if you switch, via their recommend a friend scheme.

·         Use a 0% money transfer card

A few specialist cards also allow money transfers.

“This is where the card pays cash directly into your bank account, thus clearing your overdraft, so you owe it instead, at up to 37 months 0% - very useful for larger overdrafts,” Martin explains.

4. Cut big personal loans to 2.9%

If you’re clever about it, you can get a new cheaper loan to pay your old, more expensive one off.

On his website, Martin offers up this useful four-step process to find out if you could save money on your existing loan:

STEP 1: Ask your current lender for a settlement figure. This is how much it'll cost to repay your loan in full now including early repayment costs (i.e., the amount you'd need a new loan for to pay off your old one).

STEP 2: Work out how much it'll cost you to stay where you are. Check what your monthly repayments are and how many you have left (ask the lender if you don't know). Then multiply the two to see how much it'll cost you if you stick.

STEP 3: Find the cheapest new loan for the settlement figure. For borrowing under £3,000, the cheapest route is likely to be doing a money transfer (see above). Above that, a cheap loan wins. Use our free Loans Eligibility Calc to see your likely cheapest deal. Yet remember; with loans, only 51% of accepted customers need get the advertised rate.

STEP 4: Find out which is cheaper. Use the MSE Loan Switching Calculator to see whether you should stick or not.

Cut store card costs

Store cards are basically just credit cards, but a lot of them have much higher interest rates.

For example New Look's is 28.9% APR and Argos’ is 29.9%. You can transfer the balance on these to a better credit card too.

5. What about student loan?

Martin suggests leaving your student loan while you get your other finances sorted. He said: “While it's counter-intuitive, you're actually better off just to leave it.”