November 15, 2023 at 11:38 am

What Are The Biggest Retirement Mistakes Most People Make?

by Ethan Cotler

Looking to make your retirement years truly gleaming? Want to make sure you have the most money possible to enjoy your golden years?

Let’s delve into common blunders people often make when it comes to retirement planning—and how you can sidestep them.

This valuable insight could mean the difference between being anxiety-ridden and financial tranquillity.

Dispelling the retirement at 65 myth

The pervasive belief that retiring before 65 isn’t feasible is nothing more than a myth.

Interestingly, neither your employer nor the government has set this rule in stone. Contrarily, you can start receiving some Social Security benefits as early as 62!

The roots of this misconception lie with outdated pension systems, which used to reward long-term employees with pensions—a practice almost non-existent today due to corporate reluctance towards bearing such costs and risks.

Instead, you should understand that setting a flexible retirement age aligns with personal values and aspirations—essentially, what makes life worth living for you—should dictate when you retire rather than societal norms.

Underestimating the power of early planning

Many fail to grasp how dramatically money grows over time through compounded interest.

This isn’t about hoarding money in savings accounts accruing meager annual interests; instead, the key here is to invest in a balance of stocks, bonds, and mutual funds.

However, this strategy needs time on its side. Initiating retirement planning at 25 or 30 would accrue significantly more interest over time than starting at 50.

Not utilizing employers’ retirement benefits

A shocking revelation from a survey by the U.S. Department of Labor in 2022 highlighted that almost 70% of private employees have access to retirement benefits via their employer’s offer of a 401(k) account.

So, make use of your retirement benefits! Set up your retirement account and automate monthly deposits from your paycheck—ideally between 10%-15 % of your gross salary towards securing your future.

Contributing less than what your company matches

Some employers match the contributions you make towards your 401(k) up to a certain limit—an opportunity not to be missed as it is essentially free money!

Yet many people incorrectly believe they cannot afford to save up to the maximum matching amount. Just contribute as much as you possibly can without straining finances too much.

Source: PxHere

No retirement account? No problem!

If traditional employer-based 401(k) isn’t an option for you due to being a self-employed or part-time worker—you’re still eligible for solo pension plans through banking institutions or even traditional IRAs.

Overloading your 401(k)

Surprised? Yes, over-investing in your 401(k) is a thing! Although it’s an excellent retirement tool, it’s not the most efficient when it comes to tax implications. It’s subject to higher taxes post-retirement and offers less control over investment decisions. Furthermore, early withdrawals are penalized. So you should maintain a balanced portfolio with some of your retirement funds in other accounts, like a Roth IRA could be beneficial.

Misunderstanding retirement taxes

Retirement savings aren’t exempt from taxes—the government will inevitably take its share. This includes Social Security, too—a fact often overlooked by many—so plan accordingly for future tax obligations.

Overlooking healthcare expenses

Healthcare costs can escalate during retirement years—yet many overlook this while dreaming about leisurely golf trips or summer homes.
You should realistically assess personal health risks and family medical history before setting aside estimated amounts between $150k-$200k solely for medical expenses post-retirement.

Source: PxHere

Ignoring long-term care planning

Statistically speaking, more than 70% of Americans require some form of long-term care during their retirement years—an expensive proposition seldom covered by insurance policies yet often excluded from most retirement budgets.

You should keep aside an extra $250k-$300k atop regular retirement savings while considering options like long-term care insurance.

Early withdrawals from retirement money

Unless absolutely necessary due to dire circumstances—leave your nest egg untouched!

Early withdrawals carry significant tax penalties with them, and you’ll likely lose a lot of the gains you made throughout the years.

Choosing incompatible plans

Investment plans need to align with individual risk tolerance factors, which vary according to personal situations.

Rather than getting lured by flashy online schemes promising high returns, consult a CFP to assess your risk tolerance level and choose an appropriate plan.

Over-reliance on social security benefits

Social security benefits are modest at best.

In 2023, the average monthly benefits ranged from $1.6k-$1.8k—far below the average American’s monthly income.

You should factor in additional savings to bridge the gap between social security benefits and actual living costs.

Source: PxHere

Frequent checking of retirement accounts

Avoid daily account checks and rash investment alterations based solely on market trends.

Keep a traditional savings account separate from stock markets with enough funds for six months of living expenses as an emergency fund.

Underestimating inflation

Inflation is a constant reality, especially nowadays when things like grocery prices are continuing to go higher and higher.

When planning for future years, it’s important to factor in rising costs—you can use inflation calculators or consult a CFP to estimate future requirements accurately.

Misunderstanding your financial standing

Seeing large sums in retirement accounts can lead people into thinking they’re millionaires and spending extravagantly—a dangerous assumption since early withdrawals can attract hefty penalties.

So, just be realistic about your post-retirement lifestyle and maintain a strict budget.

Source: PxHere

Adhering blindly to the $1,000 per month rule

Saving $1,000 per month is financial advice making its rounds on social media.

This number isn’t perfect for everyone, even though it sounds simple.

A CFP can help you plan better based on your salary.

Don’t do it alone!

A CFP’s rates go from $100 to $200 per hour, but they work with people on all ends of the financial spectrum.

Even if this sounds like a lot of money now, it can save you thousands in the future! Some companies even offer free sessions.

Planning for your retirement can seem daunting. Tips like these can help you get a kickstart before you seek out a CFP!

Btw, this advice comes from accredited certified financial planner (CFP) Tim Jensen. This post isn’t an endorsement of his advice, but we think it’s pretty sound.