10 Costly Retirement Mistakes and Their Impact

10 Costly Retirement Mistakes and Their Impact

Retirement planning is a critical aspect of financial life planning.  However, many individuals make costly mistakes that significantly impact their retirement savings.  These missteps and oversights can drain your nest egg and cause the retirement of your dreams to disappear.  If you know what mistakes tend to drain retirement savings, you can take precautions, make more informed decisions, and stay on track to fund your dream retirement.

Here are the top 10 mistakes, their importance, and the risks of not addressing them:

1. Not Starting Early: The earlier you start saving for retirement, the more time your money has to grow.  Although the average employee contribution rate was 7.4%, according to Vanguard, it’s essential to try putting away as much as possible to maximize your contributions.  Even if you’re putting in more than the average, conducting a pre-emptive review of what you will need for your desired retirement age and lifestyle is vital.  
2. Ignoring Inflation: Inflation erodes your purchasing power over time.  If you ignore inflation in your retirement planning, you may find that your savings don’t go as far as you expected.  For instance, at an assumed age of 65 and an inflation rate of 4%, what costs $1,000 today would double to nearly $2,000 in 18 years, or age 83.
3. Not Planning for Healthcare Costs: Healthcare can be one of the most significant expenses in retirement.  Most people are surprised to learn that an average retired couple, age 65 in 2023, will need $315,000 (after tax!) to cover health care expenses in retirement, even after Medicare, according to Fidelity Retiree Health Care Cost Estimate.  Failing to plan for these costs can quickly drain your savings.  The odds are high that most folks will need some long-term care (LTC) after age 65, which can be expensive and is only briefly covered by Medicare.  Various long-term care planning strategies are available if appropriately planned.
1. Managing Required Minimum Distributions (RMDs): Required Minimum Distributions (RMDs) are mandated annual withdrawals from retirement accounts such as IRAs or 401(k)s, which most retirees must start taking their own at Age 72/73.  But in other circumstances, such as Inherited Accounts, managing RMDs can be complex.  Also, those charitably inclined may not realize opportunities to use their RMDs to make specific charitable contributions excluded from ordinary income taxation.  This makes RMDs a complex minefield where mistakes surrounding distributions are common, often leading to potentially expensive errors and lost opportunities.
2. Not Planning for Social Security: Social Security was designed to supplement retirement savings, not replace them.  It is important to closely review and understand available benefit options and how it fits into your retirement income.  Each year you delay taking Social Security benefits until you’re 70, your benefits will increase 8% per-year!  Starting benefits before full retirement age (FRA) can also result in reduced benefits due to earned part-time income.
3. Not Setting Clear Retirement Goals: Without clear goals, it’s hard to know if you’re saving enough or investing appropriately.  A detailed plan should account for specific numbers outlining your retirement financial needs.  These include factors for your retirement location, planned activities, and your anticipated lifestyle.  With this detailed plan, you get a clearer understanding of specifics like how much longer you need to work before retirement, whether you want or need to work part-time, and your retirement expenses.
4. Penalties for Early Retirement Withdraws: Early withdrawals can result in steep fines and lost potential earnings.  While it may be tempting to withdraw retirement funds early, except in certain circumstances, doing so before 59 ½ can result in a 10% early withdrawal penalty in addition to regular income taxes.  You also will lose out on future growth opportunities.
5. Not Diversifying Investments: Putting all your eggs in one basket can be risky.  Diversification helps spread risk across different types of investments.  If one investment performs poorly, others may perform well.  You need to know the importance of managing your portfolio risk the closer you get to retirement and developing a withdrawal strategy using taxable, tax-deferred, and tax-free accounts.
6. Ignoring Tax Implications: Many folks assume they will be in a lower tax bracket at retirement, only to find out they are in a higher tax bracket than expected, and they didn’t budget enough for taxes as retirees.  Withdrawals from certain retirement accounts, such as IRAs, 401(k)s, and 403(b)s, are generally taxed as ordinary income and Pensions, which can push you into higher tax brackets and larger tax bills.  As a result, higher reported income can increase Medicare Premiums and Social Security taxability and potentially make you lose eligibility for other income threshold-based government benefits.  Another manageable factor is that Medicare uses income tax data from 2 years prior; hence, 2024 is based on 2022 reported income, potentially another vital variable when preemptively developing a retirement withdrawal strategy.
7. Not Seeking Professional Advice and Not Updating Your Retirement Plan: Life changes can affect your retirement plans and objectives.  Life never stands still, and regular reviews help ensure your plan stays aligned with your personal goals and adjusts for changes in income, expenses, or regulations.  Using an objective Fiduciary like Financial Life Planning will help ensure you stay on track.  You don’t have to do it alone.

Financial Life Planning specializes in providing personalized financial advice and can guide you through the process of retirement planning to help you avoid these costly mistakes.

Use the “Click for a Free Consultation” button if you would like to explore how we can guide you in making a sounder Financial Decision.

Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner 
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ  08053
Phone: 856-988-5480
Fax: 908-292-1040