Don’t Let These Costly Retirement Mistakes Drain Your Nest Egg
Don’t Let These Costly Retirement Mistakes Drain Your Nest Egg
Retirement can feel like a finish line after decades of working — but you may not be able to cross that finish line or really enjoy the retirement you had imagined if you get tripped up along the way.
In fact, the retirement of your dreams could disappear before your eyes with just a few missteps and oversights.
Unfortunately, that happens more than most of us realize. Just under half of the folks who are going to stop working within the next 30 or so years are expected to run out of money in retirement.1
That paints a grim picture, but it’s not all doom and gloom.
If you know what mistakes tend to drain retirement savings, you can take caution, make more informed decisions, and stay on track to fund your dream retirement.
Top 10 Retirement Savings Mistakes
Any of us can get tripped up by these common retirement mistakes if we’re not careful and if we don’t really understand the impacts of our actions (or inaction).
Here’s what you need to know to protect your nest egg and minimize the risks of running out of money when you retire.
1. Waiting to save for retirement.
It’s never too early to save for retirement. Putting off retirement savings until later in life can mean losing out on the ability to take full advantage of compound interest, meaning the ability to make interest on the interest you’ve earned.
The earlier folks start saving for retirement, the better. That’s true even if you can’t contribute a lot in those early years of your career. Every little bit helps, especially if you can start building retirement savings early.
Adopting an all-or-nothing mindset toward retirement, or delaying your savings until your 40s or 50s, can significantly hinder your financial growth. As a result, you may find yourself with fewer resources when it's time to retire.
To avoid the pitfall of waiting too long to save for retirement, it's essential to start with a plan, no matter your current financial situation. Begin by setting up an automatic contribution to a retirement account, such as a 401(k) or IRA, even if it’s a small amount. The key is consistency; by making saving a regular part of your budget, you build the habit over time. Additionally, consider increasing your contributions whenever you receive a raise or bonus. Taking advantage of employer matching programs can also significantly boost your savings. If your employer offers a match on your 401(k) contributions, try to contribute at least enough to get the full match – it's essentially free money. Lastly, regularly review and adjust your retirement savings plan to ensure it aligns with your long-term goals, and seek advice from a financial advisor if needed. The earlier and more consistently you save, the more secure your retirement future will be.
2. Not having a detailed retirement plan.
Details refer to specific numbers that outline your financial needs in retirement. These should account for factors such as your retirement location, planned activities after you stop working, and your anticipated lifestyle.
With this type of detailed plan, you should also get a clearer understanding of specifics, like:
- How much longer do you need to work before retiring
- Whether you want or need to work part-time in retirement
- Your retirement living expenses
- The best age to take Social Security
- To take a lump sum or annuity option with a pension
- Where to place specific investments to maximize tax efficiency
Without a plan in place, it’s much more difficult to:
- Consistently invest enough in retirement savings.
- Forget about key parts of your financial life in retirement.
- Get the math wrong and fail to save enough money to live comfortably in retirement.
3. Failing to consider future needs.
What will your future medical care look like and cost? At what point would you need live-in care or long-term care (LTC) facilities?
You may not know the answers or numbers off the top of your head, and that’s OK. There are several online tools available to help you estimate medical costs and LTC expenses. A professional can help too.
In general, however, it’s important to know that:
- Most folks who are 65 will need some type of LTC as they age.2
- LTC costs can be expensive, and they aren’t necessarily covered by Medicare.2
- Medical and LTC bills do cause some folks to run out of money in retirement.2
- Budgeting for medical bills and LTC costs in retirement is merely one side of the financial “coin” here. The other is to consider powers of attorney — who would you want to make financial (and healthcare) decisions on your behalf if you couldn’t later?
Considering these issues early on can give you more power and flexibility to plan for your later-in-life needs. That can provide priceless peace of mind both before and during retirement.
4. Miscalculating Social Security.
How much can you expect from Social Security, and when can you start drawing that? Will those funds be enough to support your life in retirement, or will you need other income streams?
If you’re eligible for Social Security benefits, run the numbers before you rely on them. Many folks can’t live on Social Security benefits alone — and others won’t be able to rely on these benefits at all.
So, take a closer look at what you could actually draw from Social Security and how that would fit into your retirement income. Making assumptions here can be a huge financial mistake that could send retirees back into the workforce.
To avoid the mistake of miscalculating your Social Security benefits, it's crucial to educate yourself on how Social Security works and to plan accordingly. Start by visiting the Social Security Administration’s website to get an estimate of your benefits based on your earnings history. It's also important to consider the impact of your claiming age on the amount you will receive. For example, claiming benefits at the earliest possible age, 62, will result in a reduced monthly benefit, while delaying benefits until age 70 can significantly increase your monthly income.
Additionally, factor in other potential sources of retirement income, such as pensions, retirement savings, and part-time work. Social Security is designed to replace only a portion of your pre-retirement income, so having multiple streams of income can provide the financial stability needed to maintain your lifestyle. Consulting with a financial advisor can also help you create a comprehensive retirement plan that accurately reflects your expected Social Security benefits and identifies any gaps that need to be filled by other income sources.
5. Failing to consider taxes and inflation.
What tax bracket will you be in when you retire? Many folks assume they’re going to be in a lower tax bracket at retirement, only to find out later that:
- They’re wrong.
- They’re in a higher tax bracket than expected in retirement.
- They didn’t budget enough for taxes as retirees.
Similarly, inflation can bring a lot of unwelcome surprises and put unexpected strains on your retirement income, leaving you with less purchasing power than you’d anticipated, if you haven’t factored it into your plans.
So, don’t overlook taxes and inflation when you’re considering what you need to retire and how that amount could be thinned out later.
To avoid the pitfalls of underestimating taxes and inflation in your retirement planning, it’s essential to start by taking a realistic look at your future tax situation. While many people assume they’ll be in a lower tax bracket in retirement, this isn’t always the case. For example, Required Minimum Distributions (RMDs) from traditional retirement accounts, such as 401(k)s and IRAs, could push you into a higher tax bracket. Additionally, some sources of retirement income, such as Social Security benefits, may be taxable depending on your overall income level. By working with a financial advisor or tax professional, you can estimate your future tax obligations and develop strategies to minimize them, such as considering Roth conversions or tax-efficient withdrawal strategies.
6. Investing less and less as you get closer and closer to retirement.
If retirement is around the corner, don’t automatically reduce your contributions. Run the numbers again to make sure everything’s on track. Don’t cut your retirement contributions based on assumptions alone.
Instead of automatically reducing your contributions, consider where your money can be most effectively invested. For instance, while traditional, tax-deferred retirement accounts like 401(k)s are beneficial, they may not always be the best option in your final working years. Depending on your tax situation and retirement income strategy, it might be more advantageous to direct some of your savings into a Roth IRA, which offers tax-free withdrawals in retirement, or a taxable brokerage account that provides greater flexibility and potentially lower tax liabilities on withdrawals.
Additionally, maintaining a balanced investment strategy is crucial as you near retirement. While it may be tempting to shift all your assets into conservative investments to protect your principal, this could limit your portfolio's ability to keep up with inflation. A diversified approach, which includes a mix of stocks, bonds, and other asset classes, can help you manage risk while still achieving growth. Working with a financial advisor can help you fine-tune your investment strategy to ensure you're optimizing your contributions in those critical last years before retirement.
7. Bringing too much debt into retirement.
Ideally, you’d retire with as little debt as possible. Taking excessive debt with you into retirement can burden you with a lot of financial obligations when you’re no longer working (and you’re on a fixed income). That could drain most or all of your retirement income, leaving little for the fun stuff. Instead, try to pay off as much debt as you can before you retire. That’ll free up more of your income for living expenses and whatever you want to do with your time.
8. Failing to maximize retirement contributions.
Employer matches and similar contributions are like free money. If you don’t take advantage of them, you’re effectively leaving them on the table. So, don’t do that; instead, leverage these “matching” offers you get from employers, financial institutions, or others. Invest what it takes to get the match and avoid leaving free money on the table whenever possible.
9. Borrowing from retirement savings.
Cashing out part of your retirement savings can come with hefty costs and steep penalties. While there may be a few very good reasons to take on these costs, like in the event of an emergency, it’s generally not a great idea to withdraw retirement funds early if you have other resources.
10. Failing to check in.
Life changes, and that can affect our retirement plans and objectives. If we truly want to keep our retirement goals within reach, it’s prudent to re-evaluate them from time to time. That’s usually easier to do with a financial professional.
How to Live (More) Comfortably in Retirement
Retirement can be deeply rewarding — and maybe even a little bit better — when we look out for the landmines and we know how to avoid them. Whether you’re just getting started with retirement planning or it’s time to revisit the numbers, the truth is that it’s complicated and we don’t have to do it alone.
With a little knowledge, some perspective, and the right guidance, we can stay on track with our retirement savings and give ourselves better footing to truly enjoy retired life.
Sources:
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
