10 Common Retirement Planning Mistakes

Not Starting to Save Early Enough

Retirement planning mistakes begin with failing to save early on in your career. When you start saving in your 20s or even 30s, you give your money the potential for exponential growth through compounding interest over decades. The earlier you sock money away into retirement accounts or other investments, the more time it has to generate returns and dividends that then also collect returns themselves.

Every year that goes by without saving robs you of this compounding interest and forces you to save exponentially more in later years to catch up. Starting early even with small amounts is key. If you have not begun saving by at least your 30s or 40s, you will need to save very aggressively, often 20% or more of your income. Do not make this critical mistake if you want a comfortable retirement.

Not Utilizing Retirement Accounts

One of the biggest retirement planning mistakes is failing to take advantage of tax-advantaged retirement accounts like 401(k)s and IRAs. These accounts enjoy deferred taxes on contributions, returns, and dividends earned along the way. This tax-free compound growth results in significantly higher final account balances.

Many employers offer matching 401(k) contributions up to 3-6% of your salary. By not contributing up to this match threshold, you are essentially leaving free money on the table and slowing down your retirement savings capabilities. Max out contributions to these accounts whenever possible to supercharge your retirement preparations.

Underestimating Healthcare Costs

Projecting lower-than-reality healthcare expenses is another costly retirement planning pitfall. With lifespans rising, retirees need sufficient assets to cover what could be 30 years or more of escalating insurance, medications, and long-term care expenses.

A conservative estimate is around $300,000 for a retired couple to cover premiums, deductibles, and out-of-pocket costs throughout retirement – and potentially much more with special care needs or long-term care requirements. Review your current health benefits and project increased costs in the decades ahead. Failure to adequately budget for healthcare is a severe blind spot.

Overestimating Returns

While historical averages for investment returns hover between 7-10%, such rosy assumptions can get you into trouble. The sequence of returns risk highlights how market losses near or in retirement can disproportionately impact overall portfolio longevity. Instead of expecting 10% annually, plan for conservatively realistic returns of 4-6% to protect your downside.

Building projections on overly optimistic return assumptions often lead to under-saved retirements. When less favorable market cycles emerge, later on, the math will not add up. A bear market slap in the face before or during retirement can prove very difficult to recover from fully. Plan for average or below-average returns to hedge your bets.

Not Planning for Taxes

Remember that 401(k)s and IRAs feature tax-deferred benefits – they are not entirely tax-free. Every withdrawal made in retirement from these accounts is taxed as regular income based on whatever your income tax bracket is at the time. After decades of tax-deferred compound growth, the tax hit from withdrawals can be eye-poppingly large and decimate your nest egg quicker than anticipated.

Failing to account for these taxes is a grave retirement planning mixup. You must integrate projected taxes into your overall financial plan to determine how much more must be saved to offset this future obligation. Rand Corporation cites taxes as one of the key risks that deplete retirement savings rapidly for American families. Do your homework to avoid a shock.

Not Adjusting Asset Allocation

As you enter your 40s and beyond, your overall asset allocation between stocks and conservative bonds and cash should become more conservative. Volatility from an aggressive basket of equities can spell disaster for those nearing retirement or already retired.

Declining to adjust your asset mix over time is an important oversight. The last decade or so before tapping your portfolio should transition gradually to safer, diversified fixed-income assets to prevent exposure to untimely stock market corrections. Create a glide path that gets more defensive against risk as you get closer to needing the funds.

Carrying High-Interest Debt

Part of retirement preparation must be eliminating as much debt as possible, especially high-interest revolving debt like credit cards. Entering retirement in significant credit card debt is like adding weights to your feet before a marathon. Monthly minimum payments at credit card interest rates above 15% can rapidly sap retirement budget capacity.

Pay off any outstanding revolving debt first before tapping retirement funds – otherwise, you risk your savings going more to interest fees than actual retirement expenses. Completely pay off mortgages, vehicles, and credit cards to maximize cash flow flexibility in your golden years. Broke = bad for retirement.

Forgetting to Plan for Your Spouse

An often overlooked retirement planning hazard is failing to financially provide for your spouse’s separate needs. Will your spouse require assisted living or nursing homes in their later years? Does your spouse have equivalent retirement savings of their own? If you pass first, will sufficient income remain for their living expenses for however many years remain in their lifetime?

These factors require coordination between spouses with transparency on all details of each person’s retirement planning picture. Failing to collectively map out and plan for ensuring both partners’ financial security is an unnecessary gamble leading to hardship if either person outlives the other by many years. Do not commit this cardinal retirement sin.

Not Getting Help from a Professional

Attempting to orchestrate everything in your retirement picture without input from seasoned financial professionals is akin to flying blind. There are far too many moving parts to expect flawless self-execution for most people during the retirement planning process. The stakes are simply too high.

Just a few errors or incorrect assumptions can have disastrous impacts on preparedness for successfully funding decades of retirement. An expert eye to provide reality checking can save you from natural but unacceptable optimism in your models and projections. A customized plan from a fiduciary gets you a higher-quality roadmap.

Conclusion

Avoiding key mistakes with retirement preparation sets you on the right footing for your post-career life. Starting early, using tax-deferred accounts fully, estimating conservatively, eliminating debt, working with professionals, and planning comprehensively are wise tactics. Life in your later decades depends greatly on making smart choices today. Mind these common pitfalls as you chart the roadmap to your golden years.

Retirement Planning Mistakes – FAQs

How much should I have saved by age 30/40/50?

The absolute savings required varies per individual situation, but a general rule of thumb retirement planning guidelines suggest having the equivalent of your annual salary saved by age 30, 3 times your salary by 40, and 6 times your salary saved by 50. The more you can accumulate earlier on, the better off your retirement funding outlook becomes.

How can I recover if I’m behind on retirement savings to avoid retirement planning mistakes?

If you find yourself behind target retirement savings thresholds, all is not lost. The key is aggressively boosting your monthly deferrals to retirement accounts while simultaneously cutting expenses to free up every possible dollar. This combined dual action plan of spending less and saving more is the most rapid path to catching up to where you need to be. Also, use catch-up provisions once eligible.

What percentage of my pre-retirement income do I need in retirement to avoid retirement planning mistakes?

Conventional wisdom suggests needing between 60-80% of your ending salary to maintain your current standard of living in retirement. However, the more lean your budget and lifestyle, the less replacement income you may require. Consider living off 50% or less by minimizing housing, transportation, entertainment, and dining out costs and becoming hyper-frugal.

Where should I invest my retirement savings to avoid retirement planning mistakes?

The best allocation for retirement assets includes a globally diversified mix of low-cost stock index funds and bonds across various sectors, geographies, sizes, and classes that become more income-oriented and conservative as you near needing the money. Work with a fiduciary advisor to construct an evidence-based asset allocation tailored to your situation.

How much can I safely withdraw from my portfolio every year for retirement planning mistakes?

An oft-cited retirement planning guideline is the 4% safe withdrawal rule which suggests limiting annual distributions to 4% of total portfolio value at retirement as a starting point to not outlive your money. This provides sufficient guardrails for 30 years usually. Lower your withdrawal closer to 3% or less if you desire added security and longevity capacity.

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