Avoid These 5 Costly Mistakes When Planning for Retirement

Retirement might seem like a distant goal, but the decisions you make now can have serious financial consequences down the road. Whether you dream of traveling the world or living a quiet life, planning ahead will help you achieve your desired lifestyle. However, there are plenty of mistakes to be made along the way that can stunt or, potentially, derail your progress.

Even if it’s difficult to envision your life upon retirement, it’s key to ensure you’re planning for it the right way. In this article, we’ll examine the top five mistakes people make as they plan for life after their careers—like procrastinating and failing to anticipate their future needs. Plus, we’ve gathered insights from three financial experts to help you avoid these costly missteps and gain a better understanding.

1. Starting Too Late

Delaying your savings and investing until your 30s and 40s can make a huge difference in your retirement plan. Dr. Barbara O’Neill, CFP^®, AFC^®, CEO and owner of Money Talk, explains that people who wait until these ages “lose the most valuable compound interest growth that would have occurred if they started in their early 20s and were invested for five decades.” In other words, procrastinating on your savings, even small monthly contributions can present a big opportunity cost, which can ultimately impact your net worth at retirement.

How big of a difference does it make? “For every decade that someone delays savings, the required annual savings amount to reach a specific goal (e.g., $1 million) approximately triples,” O’Neill says. Waiting too long can make it more difficult to reach your desired goal and, in some cases, even delay your retirement further depending on the lifestyle you want.

According to O’Neill, people procrastinate on saving money for retirement because of “sequential thinking (i.e., where people think they need to fund one goal at a time instead of concurrently).” She adds that, in a study on sequential goal setting she conducted with other colleagues in 2018, “Phrases like ‘once I have…’ and ‘as soon as…’ were noted frequently, indicating hesitancy to fund certain goals (e.g., retirement savings) until achieving others (e.g., repaying student loans).”

In many cases, there never is an exact right time to begin working toward your goals. If you realize that you need to start planning for retirement, we recommend seeking out a financial advisor to discuss what you can do now to put yourself in a better position later. Even if you aren’t able to afford a professional, you can typically set up a free initial consultation with most experts, which can point you in the right direction.

2. Failing to Anticipate Post-Retirement Lifestyle

It’s easy to think of retirement as an end goal or destination. However, it will become a full-fledged lifestyle that you’ll be experiencing daily. Even still, it’s very common for people to overlook the crucial question, what are you retiring to after your career?

The above question is important for two reasons – mental and financial wellness. Without having a plan for your post-retirement lifestyle, you may find it hard to feel a sense of fulfillment, happiness, or direction. Additionally, thinking ahead to your desired lifestyle will help you know how much you need to save to maintain it for the remainder of your life.

Keith Spencer, CFP^®, founder and financial planner at Spencer Financial Planning, recommends you consider and chart out “some things that you are really (really) excited about devoting time to during retirement.” For example, he suggests you “think through some new hobbies you’d like to try out. Perhaps they can be things that you’ve enjoyed in your past, maybe even your distant past.” By doing so, you’ll have a better idea of what your life should be like in your golden years, as well as how much it may cost.

A common goal for retirees is to travel frequently. In this example, it would be a smart exercise, along with a financial advisor, to consider where you would like to visit, how often you want to do so, and what it’ll cost each year. Processes like this can help you gain more clarity as you save and map out income sources for retirement.

3. Using the Wrong Investing Approach

The investment strategy you use to prepare for retirement is crucial. More specifically, the asset allocation you select for your portfolio can either put you on track toward your goals or, in some cases, slow your progress. Additionally, at different points in life, your investment needs may change, requiring a shift in your approach.

One of the mistakes here is not being aware of what you should be investing in at a given time. For instance, Spencer, an experienced financial advisor, says that there’s “a danger to investing too aggressively during retirement,” but also a risk from “investing too conservatively” during the same period. Likewise, taking big risks or not investing enough when you’re younger can seriously impact your progress toward your long-term goals.

It’s also common for people to ignore the impact of inflation. Dr. Annie Cole, Ed. D., founder and financial coach for Money Essentials for Women, points out that you should expect “your annual expenses to go up by about 3% every year between now and your retirement date.” Because rising costs can erode your purchasing power over time, it’s important to plan for it once you retire. While Social Security benefits adjust for inflation, investing in other securities that either keep up with or outpace rising costs can help you maintain the value of your money as the years go by.

The right portfolio strategy for you may not be the same as what works for someone else. Instead, the ideal allocation depends on your goals, risk tolerance, and time horizon. That’s why consulting with a financial advisor is essential—they can help you build a portfolio tailored to your needs and guide you on when to adjust your investments as your life evolves.

If you need help finding a professional near you, consider using this free matching tool. After a quick quiz about your financial situation and goals, you’ll be connected with a vetted advisor who can help you stay on track.

4. Not Planning for Decumulation of Your Assets

Up until retirement, the mindset is typically to build as much wealth as possible to ensure a comfortable lifestyle. Because of this, many overlook what to do with their money once they’re no longer working. Managing your retirement income and distributions is critical to ensure you outlast your money and are able to live your desired lifestyle.

“If you’ve been a ‘super saver’ throughout your working years, it can be very difficult to ‘flip a switch’ and transition from accumulating assets to spending them down (decumulation),” explains O’Neill. This makes it crucial to have a plan for how you plan to structure your retirement income and how you’ll begin withdrawing money from your tax-advantaged accounts, such as a Roth IRA or 401(k). Some accounts, like the latter, also require distributions once you turn 73 years old, which makes it even more important to begin withdrawing funds.

There are strategies, like the 4% rule, that can help simplify the decumulation process. This rule suggests that you can withdraw 4% of your retirement savings each year, adjusted for inflation, to ensure that your money lasts for at least 30 years. However, it’s wise to consult with a financial advisor to determine what withdrawal strategy works best for your specific situation.

Spencer also recommends avoiding the temptation to “just blindly spend whatever feels right.” Instead, he advises determining “what your spending capacity is” and preparing to “make future adjustments as life throws curve balls at you.” This flexibility ensures you can adapt to unexpected changes in expenses or income during retirement.

5. Underestimating the Impact of Taxes

Even once you retire, taxes remain a force to be reckoned with. It’s important to maintain awareness of how much you’ll need to pay, especially as it relates to any taxable investment accounts you have. Failing to account for your tax liabilities could leave you with less income than you expect, affecting your lifestyle and financial security.

Retirement accounts like the traditional IRA and 401(k), while tax-advantaged, still require you to pay income taxes when you make withdrawals. Besides needing to pay taxes on your distributions, the amounts you draw can also raise your adjusted gross income (AGI), which could trigger taxes on other income sources, like Social Security benefits. These are key reasons why it’s essential to plan for your tax burden ahead of time and develop a strategy to minimize its impact.

Another impact of taxes is from required minimum distributions (RMDs) on taxable retirement accounts. Once you turn 73, you must begin withdrawing funds from tax-deferred accounts, such as your 401(k), 403(b), or traditional IRA. Failing to take these distributions can result in a significant tax burden, including a steep 25% penalty on the amount you should have withdrawn.

To avoid any tax surprises, it’s imperative to speak with both a financial advisor and a tax planner. They can both help you create a tax-efficient withdrawal strategy that aligns with your income needs. It’s also possible that a tax professional can find deductions and credits that can lessen your annual burden.