We’ve all heard the old phrase: Mistakes happen. As is the case with anything else in life, this phrase rings true when it comes to retirement planning. Retirement planning is one of those tasks that seems perpetually on the horizon. Many view it as a distant concern, while others might think they’re too young to start planning. Yet, regardless of how you perceive retirement planning, avoiding certain mistakes is paramount. Here, we delve into nine common mistakes that can hamper your golden years.

Mistake #1: Procrastinating—both the planning process and the saving process

Retirement seems like it’s a lifetime away for most people. It’s easy to push it aside and focus on the present instead. However, delaying retirement planning can lead to significant financial challenges down the road. As life expectancy continues to rise, retirement is becoming a more extended phase of life. Without a proper plan, you can risk outliving your savings and having to depend on Social Security as your only means of support.

The saying “the early bird gets the worm” holds true for retirement planning. The sooner you start saving, even if you’re only making small contributions, the more time your money has to grow through the “magic” of compound interest. Waiting even a few years can cost you significantly in potential earnings.

Mistake: Assuming you have plenty of time and can always start saving later.
Solution: Begin saving as early as possible, even if it’s a small amount. As you advance in your career and earn more, gradually increase your contributions.

Mistake #2: Underestimating Retirement Expenses

Looking ahead to retirement, many people often imagine themselves enjoying the fruits of their labor, free from the daily stresses of work. However, what they don’t always consider are the expenses that come with retirement and how they can quickly add up. From healthcare costs to housing and travel, there are a multitude of potentially pricey necessities that could catch you off guard if you’re not prepared. While it’s easy to think that your retirement savings will be enough to see you through, it’s important to do your research and make sure you have a realistic understanding of just how much you’ll need to live comfortably and happily.

Mistake: Assuming your current expenses will mirror your retirement expenses.

Solution: Do thorough research, use retirement calculators, and work with a financial professional to help you have a better understanding of your potential expenses.

Mistake #3: Not Considering Inflation

Unfortunately, many people make the mistake of not considering inflation when crafting their retirement plan. Inflation refers to the increase in the prices of goods and services in an economy over a period of time. Put simply, inflation means your dollar won’t go as far in the future as it does today. This can be caused by several factors such as an increase in demand, a supply shortage, or even changes in government policies.

What may seem like a comfortable retirement income now may not be enough to cover your expenses in 10 or 20 years. For example, what $100 can buy today might require $150 or more in 20 years due to inflation. This means if you’re only saving based on today’s costs, you might find yourself with a shortfall when you retire. It’s important to take this into account when planning, so you can enjoy the retirement you deserve.

Mistake: Overlooking the long-term impact of inflation on savings.

Solution: Regularly adjust your savings goal upwards to account for the diminishing purchasing power of money over time. Engage with financial tools that provide inflation-adjusted returns and consult with knowledgeable professionals to try to help your retirement fund grow at a rate that outpaces inflation.

Mistake #4: Relying Solely on Social Security

Social Security is undoubtedly a crucial source of income in retirement, providing a much-needed safety net for millions of Americans. However, it’s important to remember that it’s not intended to be the sole source of financial support in your retirement years. Relying completely on Social Security benefits can be risky, as it likely will not be enough to cover all your expenses or provide the lifestyle you want in retirement. It’s crucial to understand early on that Social Security should be viewed as just one component of a comprehensive retirement strategy. By diversifying income sources and actively planning for retirement, individuals can better facilitate a comfortable and financially stable post-work life. Explore other options to help supplement your income, such as saving for retirement early, investing wisely, and considering additional sources of income like part-time work or a retirement business.

Mistake: Believing Social Security will fully cover your retirement needs.

Solution: Prioritize personal savings and investments as main pillars of your retirement plan. Consult with financial professionals to diversify income sources and understand the actual benefits Social Security will provide.

Mistake #5: Taking Unnecessary Financial Risks
It’s easy to understand why you would want to make sure you’ve prepared yourself financially for when your retirement comes, but it’s not always easy to know what to do. One of the biggest mistakes people make while planning for retirement is taking unnecessary financial risks. Sure, a high-risk investment might bring big rewards, but it could just as easily leave you with nothing. Similarly, not diversifying your investments properly is risk. Market downturns, sector-specific volatility, or company failures can significantly impact your savings if your portfolio is concentrated in just a few stocks, industries, or asset classes.

It’s important to be cautious and think carefully about where you’re putting your money. After all, you’ve worked hard to earn it, and you want to make sure you have enough to live comfortably. Some lower-risk investments to consider for your retirement plan include treasury bonds, certificates of deposit (CDs), mutual funds, exchange-traded funds (ETFs), money market funds, and annuities.

Diversifying across various asset classes—like stocks, bonds, real estate, and commodities—helps to spread the risk around. As market conditions change, some assets might perform well while others falter, potentially offering a buffer against severe portfolio downturns. It’s essential to understand that a balanced approach, tailored to individual needs and risk tolerance, often leads to more stable and predictable growth over time. By actively managing and diversifying investments, retirees can better position themselves for a financially secure future.

Mistake: Putting all your retirement savings into high-risk investments or a single stock or asset class.

Solution: Create a diversified portfolio across different asset classes and risk levels. Regularly review and rebalance based on your age, risk tolerance, and retirement goals. Seek advice from financial professionals to optimize asset allocation.

Mistake #6: Overlooking Healthcare Costs

One of the things that people often overlook when planning for retirement is the cost of healthcare. While Medicare will cover some expenses, it may not cover everything, and the out-of-pocket expenses can add up quickly. From copays to prescriptions, dental care to long-term care, healthcare costs can easily eat into your retirement savings. It’s important to include these costs in your retirement plan and consider options for additional coverage, such as a Medicare supplement or long-term care insurance.

Mistake: Assuming Medicare or basic health insurance will cover all your healthcare costs in retirement.

Solution: Research supplemental health insurance policies, consider Health Savings Accounts (HSAs), and set aside additional funds specifically for potential healthcare expenses.

Mistake #7: Failing to Review and Adjust Your Plan

Another common mistake that many individuals make is failing to adjust their retirement plan when necessary. It’s easy to set a plan in motion and assume it will work flawlessly until the end of your days—or worse, forget about it completely. However, life rarely goes as planned, and it’s important to keep that in mind when crafting your retirement strategy. Factors such as unexpected medical expenses, changes in living circumstances, and unforeseen market conditions can all impact your savings and investments. Failing to adjust your plan accordingly could leave you with serious financial issues down the line.

Mistake: Setting a retirement plan and forgetting about it.

Solution: Regularly review and adjust your retirement plans and investments, ideally annually or during major life changes.

Mistake #8: Ignoring Tax Implications

Planning for retirement doesn’t end with just saving money; understanding the tax implications of those savings is equally vital. Different retirement accounts, from 401(k)s to traditional and Roth IRAs, come with distinct tax rules. Not fully grasping these rules can lead to unexpected tax bills, which can eat into the funds you’ve set aside for your golden years.

For instance, while contributions to traditional IRAs and 401(k)s are made with pre-tax dollars, resulting in an immediate tax break, withdrawals in retirement are taxed as ordinary income. On the other hand, Roth IRAs are funded with post-tax dollars, meaning no tax break up front, but qualified withdrawals are tax-free.

By being proactive and understanding these tax nuances, retirees can formulate a strategy that optimizes tax efficiency and maximizes their hard-earned savings. Working with a tax professional can offer insights into crafting a withdrawal strategy that considers the tax implications.

Mistake: Overlooking the tax consequences of retirement withdrawals and distributions.

Solution: Educate yourself on the tax rules associated with various retirement accounts and consider strategies like Roth conversions or tax-efficient withdrawal plans. Collaborate with a tax professional to potentially maximize your after-tax retirement income.

Mistake #9: Not Talking to a Financial Professional

Retirement planning involves a myriad of decisions, from investment choices and tax considerations to distribution strategies and estate planning. While there’s a wealth of information available online, parsing through it all and knowing what applies to your unique situation can be overwhelming—and relying solely on your own intuition and knowledge can be dangerous. Moreover, the financial landscape is continually evolving, making it challenging for individuals to stay current.
Many people mistakenly believe that they can handle the task alone, without realizing the intricate and complicated nuances of financial planning. An advisor can bring clarity, offer invaluable insights, provide a customized strategy aligned with your goals, risk tolerance, and needs, while also adjusting plans as market conditions and personal circumstances change. It’s never too late to consult with a professional to help guide you with making your financial decisions.

Mistake: Believing you can navigate the complexities of retirement planning on your own.

Solution: Schedule regular consultations with a financial professional who can provide guidance tailored to your personal situation. They can help identify potential pitfalls and assess whether your retirement planning is on the right path.

Takeaways

Avoiding these retirement planning mistakes can make a significant difference in the quality of your golden years. A little forethought, strategic planning, and guidance from professionals can help you be better positioned to have the means to enjoy retirement fully. In the end, retirement is meant to be a peaceful and fulfilling time in your life. By taking the time to educate yourself and create a solid plan, you can potentially avoid these pitfalls and help yourself achieve your retirement goals. Remember, it’s never too early to start planning, and your future self just might thank you for it.

If you need help with your retirement planning, we’re here to help. Contact us here today.

 

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Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

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References

Five Retirement Mistakes to Avoid. (n.d.). Wells Fargo. https://www.wellsfargo.com/financial-education/retirement/avoid-mistakes/

O’Connell, Brian. (August 9, 2023). 6 Low-Risk Investments with High Returns for Retirees. U.S. News. https://money.usnews.com/investing/investing-advice/articles/high-return-low-risk-investments-for-retirees

Probasco, Jim. (November 17, 2022). The 11 Worst Retirement Mistakes: Sidestep Them. Investopedia. https://www.investopedia.com/retirement/how-sabotage-your-retirement/