Retirement planning has a bad reputation, mostly because the consequences of not planning for retirement seem so far away. The first, and worst, of all common retirement mistakes is waiting until too late in life to get started with retirement planning.
The problem here is that retirement planning mistakes compound much like retirement planning successes. By not starting early and in earnest, you could be cheating yourself out of hundreds of thousands of dollars in interest, and I mean that quite literally. Even diverting as little as $1 a day towards retirement can make a huge difference in what you can afford after your first career.
It might be difficult to treat retirement as a series of decisions that you need to make now, but I guarantee you that once you begin you will see and feel a difference in your approach to retirement.
The Top 10 Retirement Mistakes
Retirement is a complex undertaking, and there are many more mistakes not included on this list that can come up as pitfalls to a successful retirement. These ten are generally recognized as the most common though, and can serve as guideposts as you review your own retirement planning.
- Starting too late in life. The reason retirement planning works is compound interest: After you get started, the more money you put in, the more interest and gains you can earn. That means the earlier you get started, the more you’re likely to have when it’s time to start drawing down your nest egg.
- Failing to plan. It’s an old adage that if you fail to plan, you plan to fail, and that’s never truer than when talking about retirement. Setting up an IRA with automatic deductions is only the start. Would-be retirees need to consider their cost of living at retirement, estimated retirement age, investing strategy, and more to have a solid chance at a comfortable retirement.
- Using an overly aggressive investing strategy. Overly aggressive investing strategies used to be the reserve of youthful risk takers, but thanks to the downturn those approaching retirement are also considering taking risks. As a general rule, the closer you are to retirement the more conservative your strategy should be.
- Using an overly conservative investing strategy. Being too conservative can be just as devastating as being too aggressive. Overly conservative investing, such as allocating the majority of your assets to bonds and mutual funds, ensures poor returns – usually between 1 and 5% per year. That doesn’t even keep up with the cost of inflation, meaning that by being too conservative, you are actually losing money. This is a huge retirement planning mistake.
- Failing to diversify your portfolio. The amount you have allocated to each investment class will change as you age, but as a rule of thumb you should never have more than 50% of your retirement balance in any one class – and 50% is on the high side. Use free tools like Bankrate.com’s asset allocation charts to compare your investments to the recommendations for your age.
- Exiting in a downturn. One reason so many people are now delaying retirement is because when the market started sliding in 2007, they took all of their money out and put it in “safe” investments like CDs. That only locked in their losses. Once they felt confident enough to re-enter the market, they were buying shares back at higher prices, plus fees.
- Not accounting for taxes. When you contribute to a qualified retirement plan, your contributions are tax deductible or before tax, depending on the plan. That means that when you retire, the taxes will come due. Speak with a retirement advisor now about how to minimize the impact of these future taxes based on your expected tax rate at retirement.
- Retiring too early. When you retire early, you have the benefit of enjoying more of your post-career life, at the cost of higher taxes and fees. To start, the earlier you retire, the fewer government benefits you will receive; your tax rate may also be different. Additionally, the earlier you retire, the sooner you stop contributing to your retirement nest egg, and the longer it will have to last.
- Miscalculating medical costs. According to Fidelity, health care costs in the U.S. increase by an average of 6% per year. Depending on your health picture, your costs may be higher than average, but you should never assume that they will be lower. As the costs go up and people live longer, medical expenses are taking a larger bite out of retirement. Ensure that you will have enough to cover your needs and avoid this retirement mistake.
- Outspending your means. Outspending your means is easy at any life stage, and at any life stage, this impacts retirement. You may have heard that forgoing coffee on the way to work and putting that daily $5 towards retirement can result in $300,000 more in your retirement account by age 65. But it’s equally easy to outspend your means in retirement. Create a budget for retirement living decades before you need it and stick to it to make sure you can support yourself in your desired lifestyle.
Avoiding Retirement Mistakes
You should also consider whether consulting with a financial advisor on an hourly basis could help you reach your retirement planning goals. Whether you choose to use help or take the do it yourself approach, remember that your retirement is your money and your future, and take care of it well.