The Biggest Mistakes People Make When Planning for Retirement
Planning for retirement is one of the most critical financial decisions you make, yet it’s also one of the most commonly misunderstood. Because retirement can feel far off, many people unintentionally make choices today that often lead to financial stress down the road. Here are some of the biggest and most common mistakes people make when planning for retirement:
1. Starting Too Late
This is one of the leading problems when planning for retirement. It’s always better to start saving earlier rather than later. The power of compound interest works best over time. Delaying savings by even a few years can drastically reduce retirement funds. For example, saving $500/month starting at 25 can grow to over $1 million by 65. However starting at 40 may require you to save more than twice as much.
2. Buying Into an Annuity
Annuity’s often have fee contracts that will significantly affect the potential return on your investment. Indexed annuities restrict your return by placing a “cap” on the overall return. Compared to other investments, this prevents a higher return if the stock market is performing well.
3. Not Accounting for Healthcare Costs
An average couple retiring at 65 may need over $300,000 just for healthcare expenses. These include premiums, co-payments, deductibles but do not include long-term care. All of these expenses are in addition to the basic living expenses you will need in retirement.
4. Not Planning for Longevity
Many retirees underestimate how long they’ll live and end up running out of money as a result. This leaves you in a position to solely rely on social security or becoming financially dependent on family. Many people plan to work past 65 to make up for savings shortfalls. However, oftentimes health issues, layoffs, or caregiving responsibilities force people into early retirement.
5. Ignoring Inflation
Inflation eats away at purchasing power over time. Even 2–3% inflation means your money will be worth significantly less over 30 years. Having a diversified portfolio that includes bonds and growth orientated investments like equities help your portfolio to keep up with the cost of inflation.
6. Failure to Create a Tax Efficient Withdrawal Strategy
Not having a withdrawal strategy for retirement can lead to inefficient taxes implications or a premature depletion of funds. People often assume retirement income will be tax-free. Withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income. Poor tax planning can lead to large, unexpected tax bills in retirement. Even strategies like delaying Social Security for a higher payout are important to consider for withdrawal schedules. Taking Social Security at 62 permanently reduces your monthly benefit. Social Security is designed to replace only about 40% of your pre-retirement earnings. It should be one part of a broader retirement withdrawal strategy, not the whole plan.
7. Not Getting Professional Help
Many people assume retirement planning, but don’t understand key concepts like asset allocation, risk management, tax efficiency, or withdrawal strategies. Schedule a complimentary consultation with one of our financial advisors today to learn more about our personalized financial planning process can help you be prepared for retirement.
Grace Kennedy
Financial Planning Associate, Wiser Wealth Management
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