24 Costly Retirement Planning Mistakes to Avoid
When it comes to saving and planning for retirement, there are several mistakes that can cost you big time. To avoid these crucial errors and set the groundwork for a secure retirement, it’s essential to think about the future, plan ahead, and ensure your financial goals are well-grounded.
Keep in mind these 24 costly retirement planning mistakes to avoid. While this isn’t an exhaustive list, it’s a good starting point, whether your “sayonara” to the workplace is on the horizon or you still have some years to go.
Detailed Look at 24 Costly Retirement Planning Mistakes to Avoid
We will go into each of these frequent mistakes in more detail, but here is a quick sum-up:
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- Having no retirement plan
- Not calculating how much you will need to retire
- Not knowing how much retirement income you will need
- Not taking full advantage of retirement plans and accounts
- Failing to capitalize on an employer match
- Not increasing retirement savings after a pay raise
- Neglecting to do annual reviews on your financial progress
- Not regularly checking beneficiaries on retirement accounts
- Raiding your qualified retirement plan early
- Cashing out your retirement accounts
- Underestimating how long retirement might last and its cost
- Failing to shift to a more conservative approach near retirement
- Not talking with your spouse about your personal retirement goals
- Thinking about retirement only in financial terms
- Not calculating required minimum distributions
- Not planning for taxes in retirement
- Taking Social Security too early (if not right for your situation)
- Forgetting about inflation in retirement
- Assuming you won’t work in retirement
- Thinking that you might be able to work for all of retirement
- Failing to account for retirement healthcare costs
- Starting retirement planning way too late
- Despairing because you started late
- Retiring too early
1. Having no retirement plan
This is a retirement mistake that can cost you big time. Many people today won’t have a guaranteed pension to draw from after they stop working. It’s on them to invest and build up their nest egg so that they have a source of income to replace their career earnings in retirement.
In order to meet that goal, you should have a plan for retirement and be socking some money away, regardless of what the money is invested in. You will be glad that you did act now when you retire.
2. Not knowing how much retirement income you will need
This is one question that you should definitely have the answer to before you stop working. While it’s nice to have an idea of what your retirement income needs may be in the early-experienced to mid-career stages of your life, it’s hardly a dealbreaker.
As you near retirement, your monthly income needs then will be a valuable clue-in for what your future income needs will be. A financial professional can help you compute this number, and if retirement will be within the next 10 years or less for you, the sooner you find this out, the better. As the old saying goes, most people don’t plan to fail, they just fail to plan.
3. Not calculating how much you will need to retire
This mistake comes up frequently. You should have a ballpark idea of how much money you will need for a comfortable retirement, based on your lifestyle expectations. That starts with understanding what your income needs will be in retirement, which is figuring out those numbers from the prior mistake can help.
Not only should you know how much money you need month to live comfortably; you should also have an idea of how much money you will need to have saved in order to generate that income after you stop working.
The number may be much larger (or smaller) than you think. Some retirement strategies can help you maximize your income so that you make more of your nest egg and stretch it out for an entire retirement. Ask your financial professional about those options if you are nearing the “call-it-quits” stage.
4. Not taking full advantage of retirement plans and accounts
Many employers offer defined-contribution savings plans that allow you to save for retirement. The money comes right out of your paycheck for this.
Should you want to save additional funds for retirement, there are a variety of options, including traditional and Roth IRAs. A Roth IRA can be a good choice for tax-free income in retirement, assuming that your income isn’t too high so that you are able to contribute to one.
5. Failing to capitalize on an employer match
This is another common retirement-saving mistake. Matching employer contributions are essentially free money for you, and the best part is that free money will grow for you tax-deferred until you retire.
If you pass up on those contributions, you could be costing yourself thousands of dollars in retirement. Take advantage of your employer match while you are still working, and those contributions can add up over time.
6. Not increasing retirement savings after a pay raise
Getting a raise at your job is great. Failing to adjust the portion of that raise that goes toward your retirement contributions isn’t so great. In fact, it can be a serious mistake.
Financial professionals will tell you to pay yourself first so that you can ensure that you will have enough money to retire with in your later years. Increasing your retirement plan contributions by even a percent or so every year can make a sizeable difference in what you end up with.
7. Neglecting to do annual reviews on your financial progress
Your retirement savings usually don’t need constant monitoring while you are working. However, it’s a good idea to go over your retirement savings at least once a year as you get closer to retirement.
When you get to be within five to ten years of retirement, you don’t have as much time to make up for market losses as you did before. An annual checkup can help you to ensure that your retirement savings are still on track.
8. Not regularly checking beneficiaries on retirement accounts
Have you married, divorced, or experienced a growing family since you started your retirement plan? Then now may be a good time to update all of your retirement plan beneficiaries.
You may currently have beneficiaries listed that don’t reflect those life changes, so it’s time to make some changes. If estate planning concerns such as probate are on your mind, you might consider options such as trusts (or other means for passing on wealth to your loved ones).
9. Raiding your qualified retirement plan early
Here is yet another frequent, crucial error that you can make with your retirement savings. It may be tempting to take a sizeable withdrawal out of your retirement savings to pay off a debt or make a major purchase.
However, don’t forget – not only are you taking that money out of your plan, but you are also taking out all of the future earnings on that money. That can add up quickly.
10. Cashing out your retirement accounts
This retirement mistake is even worse than raiding your plan. You will pay a 10% early withdrawal penalty on everything you take out if you are younger than 59.5. What’s more, you may also land yourself in a higher tax bracket this year.
No financial professional or tax advisor will ever encourage you to do this. You are essentially cutting off your own financial future by doing this, so think twice before taking this course of action.
11. Underestimating how long retirement might last and its cost
In past generations, workers lived into their sixties and then usually died. But modern healthcare and technology now have enabled people to live longer.
You may be retired for at least 30 years if you are in good health. The latter years of retirement may involve you needing some sort of long-term care support. Don’t forget about including your possible longevity into your retirement plan so that you aren’t caught at a point when options of generating additional income might be limited.
12. Failing to shift to a more conservative approach near retirement
Many people who planned on retiring before a market correction hit, have experienced the same outcome: they had to work for some years in order to make up for their losses. If you haven’t updated your retirement strategy for at least ten years, then it’s probably time to make some changes.
This doesn’t mean getting out of stocks entirely. But it’s good to be in a place where a severe market correction won’t derail your retirement plans. This may be a good time to start looking at financial options, such as fixed index annuities or other fixed annuities, that can help protect against losses and generate predictable income.
13. Not talking with your spouse about your personal retirement goals
This retirement planning mistake can put a big strain on your relationship with your significant other. It’s important for couples to be on the same page.
If your spouse wants to travel after you stop working, then you should at least be open to discussing it, for instance. However, if all you want to do after you retire is play with model trains, then some very frank discussions are needed about how things will be after your working years. It’s good to think ahead, be ready for some compromises, and stay flexible regarding what you will do with your time.
14. Thinking about retirement only in financial terms
When you retire, it’s a major life change. You transition from a lifestyle with a career, social connection, and other structures to a lifestyle with newfound free time, personal activity, and even new identity.
Retirement is much more than a financial event. It marks the end of a major period of your life and gives you the chance to redefine yourself in many ways.
You will no longer be an accountant, a corporate executive, a plumber, or whatever else your career path was. Now is the time to find a new identity and acclimate yourself to a new, daily routine.
Spend some time thinking about this and how you want to approach it before you get there.
15. Not calculating required minimum distributions
Although most financial companies will do this for you, it’s a good idea to project how much you will have to take out for RMDs and what impact that will have on your income taxes.
Failure to take RMDs can lead to severe penalties and a great deal of inconvenience. The age at which you start required minimum distributions will depend on your age now. If you were born on June 30, 1949 or earlier, you have already started RMDs at 70.5 and will have to continue taking them. For those born on July 1, 1949, through and including December 31, 1950, RMDs would have started at age 72.
If you were born on January 1, 1951, through and including December 31, 1959, the age for starting your RMDs is 73. Notably, for those born on January 1, 1960 or later, an elevated age for starting RMDs at 75 will come into effect in another 10 years (2033).
16. Not planning for taxes in retirement
This is one of the biggest retirement planning mistakes that comes up. You may think that your income in retirement will be low enough that taxes won’t matter. That can be a risky assumption to make, especially as the U.S. national debt grows.
The prospect of higher taxes applies even more if you plan on starting a business or working a second job after you retire. Your income may bump you into higher tax brackets than you expected.
Statistics show that many retirees have incomes equal to at least 80% of what they were when working. Be sure to talk to your tax advisor about what you will pay in taxes after you retire. Looking into tax-smart money moves is good to do now.
17. Taking Social Security too early (if not right for your situation)
Many people start taking Social Security at age 62 because they fear that the system is going to run out of money soon. This is a popular misconception, and one that isn’t likely to materialize in the near future. There is a chance of reduced monthly payments for Social Security beneficiaries in 2033, however, if changes to the program aren’t made.
Even so, you may be better off waiting until you reach full retirement age or even age 70 before you start collecting benefits. Consult with a Social Security expert if you aren’t sure of the best course of action for you.
18. Forgetting about inflation in retirement
If you have all of your retirement savings tied up in low-risk financial instruments, then inflation is a heightened risk to account for. Do you plan on using an annuity for part of your retirement income strategy, but still worry about inflation? Then consider an annuity with an inflation rider that can increase your payout each year.
Talk to your financial professional about keeping some of your retirement money in stocks, or other growth-driven investments, so that you can keep up with inflation. Remember, if your fixed-interest assets guarantee the return of your principal and rate of interest, then they have inflation risk.
19. Assuming you won’t work in retirement
You may surprise yourself and discover that you want a second career after you quit your “primary” job. Or you may find yourself having to go back to work to make ends meet after you retire.
Whatever the reason, working during retirement is becoming more common. Unless you have enough retirement savings, a part-time job may help for a while in order to bolster your cash-flow.
20. Thinking that you might be able to work for all of retirement
This is on the other end of the working-in-retirement spectrum. Chances are you probably won’t be able to work full-time, or maybe even at all, no matter how much you love your job. It’s important to think ahead about this scenario instead of relying on “hope-ium” – or hoping that your job will always be a consistent income source.
In later years, you may have some need for long-term care or other support that can affect your work situation. Talk to your financial professional about options that can help you be ready.
21. Failing to account for retirement healthcare costs
The odds are that you and your spouse together will pay medical bills of at least $200,000-$300,000 after you retire. Those numbers may not even account for time and money spent on long-term care needs.
Some insurance vehicles can help cover these costs, as they pay a multiple in benefits per dollar of premium put in. If you are nearing retirement, the sooner you start exploring this, the better. This is because it will be lower cost and easier for you to qualify for them when you are younger.
22. Starting retirement planning way too late
This is another one of the biggest mistakes you can make when it comes to saving for retirement. Those who start saving in their early years can amass a sizeable chunk of money by the time they retire, even if they quit saving at some point.
Time is one of your biggest assets when it comes to retirement planning. Don’t let it go to waste.
23. Despairing because you started late
On the other hand, it’s never too late to start saving for retirement. If you are in your fifties and have no retirement savings, you can still open a retirement account and start socking away money now. Also look at your workplace and see if there is a qualified retirement plan to which you can contribute, especially if it has an employer match.
If you can take advantage of “catch-up” contributions, you can help offset your late start by using this extra money to boost your portfolio.
24. Retiring too early
This is another common mistake. If you want to retire at age 60, then it’s wise to make some realistic cash-flow projections that last for at least 30 or 40 years. If you retire at age 60 and live into your nineties, then you should be sure that your money can last that long.
Don’t forget about healthcare and other expenses as mentioned in prior mistakes, too. You worked for many years to reach a secure retirement. Talk to your financial professional about ways that you can enjoy a fulfilling, confident lifestyle once you have exited the workplace.
Looking for Personal Guidance to Avoid These Retirement Mistakes?
Nothing is foolproof, but if you are looking for ways to avoid these retirement planning mistakes and have a secure financial future, consider talking to an independent financial professional. The ideal guide will have some experience under their belt, have been through different market and economic conditions, have helped clients in all sorts of personal situations in those conditions, and have continuing education to stay on top of law and retirement financial planning changes.
If you would like to speak with an independent and experienced financial professional about your situation, many are available at SafeMoney.com to assist you. Get started by using our “Find a Financial Professional”, where you connect with someone directly and talk about your goals and concerns. Should you need a personal referral, please call us at 877.476.9723.
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