Peace of mind in retirement is largely the result of how well you’ve done in planning for that stage of life. Planning for retirement is a complex process that requires careful consideration of multiple factors. Mistakes made during this period can significantly impact one’s quality of life during retirement. Fortunately, many retirement planning mistakes can be avoided by seeking and heeding the advice of qualified financial experts.
Mistake 1: Waiting Too Long to Get Started
Ideally, retirement planning begins early, decades before you’re going to need to supplement your other sources of retirement income. The earlier you begin planning and the more carefully you plan for retirement, the more comfortable you’re likely to be during the twenty or more years most of us can look forward to after leaving the workforce. So it’s not surprising that one of the worst mistakes people make in planning for retirement is not starting sooner rather than later.
Delaying retirement savings limits the time for investments to grow, leading to insufficient funds to support a comfortable retirement. The solution is to begin saving as early as possible and consider increasing your contributions as retirement nears.
Mistake 2: Over-Reliance on Social Security
Don’t be lulled into a false sense of security by thinking that your future Social Security benefits alone will be enough to live on comfortably in retirement.
Social Security benefits are typically designed to replace only a portion of a person’s pre-retirement income—usually around 40% for average earners. For most people, this is far too low to cover all living expenses in retirement. Even with Cost of Living Adjustments (COLAs), retirees may see their purchasing power decrease over time, especially with rising healthcare costs, as healthcare can be a major expense in retirement. And many people are living longer than expected, which can stretch Social Security benefits thinner over time. While Social Security can be a steady source of income, it may not be enough for retirees who live into their 80s or 90s.
Additionally, there are ongoing concerns about the long-term solvency of the Social Security system, as the number of retirees is increasing while the working-age population paying into the system is shrinking. While it’s unlikely that Social Security will disappear, future changes to the system, such as benefit cuts or a higher retirement age, could reduce the amount received.
Consequently, it’s crucial to have additional retirement savings through employer-sponsored plans (like 401(k)s), personal savings, and investments to ensure a comfortable and secure retirement.
Mistake 3: Not Maximizing Employer Benefits
While many employers provide matching contributions as an incentive for employees to save for retirement, it’s not a universal feature across all plans or companies. Larger companies and those in competitive industries may offer more generous matches to attract and retain talent.
Under one common matching formula, the employer contributes 50 cents for every dollar the employee contributes, up to 6% of the employee’s salary. Some employers match dollar-for-dollar up to a certain percentage of the employee’s salary, commonly 3% or 4%.
If you’re fortunate enough to work for a company that offers to match employee contributions, be sure to enroll and try to contribute at least enough to receive the full employer match, as it’s effectively additional compensation.
Mistake 4: Not Having a Personal Income Strategy for Retirement
In the last decade or so of your working life, generally by age 55-57, you need to have a strategy in place to ensure you will have sufficient income once you retire. This typically involves developing a personal budget that determines how much income you will need to support the lifestyle you want to maintain in retirement. Some people nearing retirement plan to downsize to a smaller home or move to another area. Some may be planning an early retirement, while others may prefer to continue working at least part-time, perhaps beginning a second career.
Decisions such as these will determine not only your future expenses but also the income necessary to meet them comfortably. For example, the amount of your Social Security benefits will be based on your lifetime earnings history and the age at which you begin claiming benefits. Starting to claim benefits early means your monthly payments will be reduced compared to waiting until the full retirement age. On the other hand, working beyond full retirement age can increase your benefit payments once you start claiming them.
And bear in mind that if you retire early before you are eligible for Medicare, you’ll have to fund your own health insurance and medical expenses until you are eligible to enroll in Medicare. And even then, you may incur medical expenses not covered by Medicare, such as copays and deductibles or the cost of long-term care.
Mistake 5: Ignoring or Underestimating the Impact of Inflation
Inflation reduces purchasing power over time. Not accounting for inflation in your retirement planning and investing can lead to a shortfall in funds during retirement. It’s important to allocate some of your investment dollars to assets that have the potential to grow in value at a rate that in the long run, outpaces inflation, such as stocks or real estate.
Mistake 6: Carrying High Debt into Retirement
Not paying off debt prior to retirement and having to continue making payments during retirement can strain fixed-income resources. Planning for retirement should include developing a debt repayment plan to eliminate high-interest debts before leaving the workforce.
Mistake 7: Early Withdrawals
Withdrawing funds from a retirement plan prior to age 59 ½ can incur penalties and reduce the overall retirement nest egg. Admittedly, life can throw anyone an unexpected curveball, such as a catastrophic accident or illness, and they may have no other option. The best way to avoid having to make early withdrawals is to have sufficient insurance and an easily liquidated emergency fund in place to weather a financial crisis.
Mistake 8: Ignoring Required Minimum Distributions (RMDs)
Similarly, waiting too long to make withdrawals from a retirement plan can result in hefty tax penalties. Retirees need to stay informed about RMD rules and schedule withdrawals accordingly.
Mistake 9: Lack of a Sustainable Withdrawal Strategy
Without a plan, retirees may withdraw too much too soon, risking depletion of funds. Excessive spending in the initial years can jeopardize long-term financial security. The solution is to adopt a withdrawal strategy that balances income needs during retirement with preserving capital, such as the 4% rule. This guideline suggests withdrawing 4% of your retirement savings in the first year of retirement. In subsequent years, you adjust that initial withdrawal amount for inflation. The goal is to provide a steady income stream while maintaining a high probability that your savings will last for a 30-year retirement period.
Withdrawals from a retirement plan can have significant tax consequences, reducing net income. So be sure to strategize withdrawals to minimize tax liabilities, perhaps with the help of a tax professional.
Mistake 10: Failing to Adjust Investment Strategies
Not rebalancing portfolios, both before and during retirement, can expose retirees to unnecessary risks or insufficient growth of invested funds. It’s important to review and adjust investments periodically to align them with your own changing risk tolerance as well as market conditions.
Get Expert Advice from Crosby Insurance Group
Ready to secure your retirement? Crosby Insurance Group offers comprehensive retirement planning solutions tailored to your specific needs. Our experienced advisors can help you navigate complex financial decisions, optimize your investments, and minimize tax burdens. Contact us today for a personalized consultation and take control of your financial future.
