The Top 5 Retirement Planning Mistakes (and How to Avoid Them)
The entirety of your time within the work force has led you to this moment. Retirement – a significant milestone that has (hopefully) been planned and thought out for many years prior. Yet, even with early preparation, it’s easy to make missteps along the way. For those who are in the beginning, middle, and even late stages of their retirement planning journey, there are a few common pitfalls that one must be aware of in order to avoid.
As Park Avenue Securities President Marianne Caswell wisely points out, “Many people say they want to travel, garden, or spend time with their children and grandchildren during retirement, but they don’t map out a solid plan for how much these activities are likely to cost. This could mean that once they retire, they won’t have saved enough to do what they want, or they might be unnecessarily cautious about spending money, preventing them from enjoying themselves.”
However, careful planning and avoidance of common mistakes can allow one to enjoy the fruits of their labor and get the most out of their golden years.
1. Underestimating How Much You’ll Need
With lifespans ever increasing, it is easy to underestimate the cost of retirement. You may have enough funds for a certain amount of carefully planned out years, yet, as we find, life often has other plans than the ones we’ve made.
Other considerations one must make, not exhaustively, are inflation and healthcare, which will be discussed in more detail later in this blog.
How to Avoid It:
Calculate Realistic Costs: Use tools or work with a financial advisor to estimate your annual expenses in retirement, including essentials like housing, healthcare, and discretionary spending on travel or hobbies.
Account for Inflation: Build in a buffer to account for the rising cost of goods and services over time. A 3% annual inflation rate can significantly erode purchasing power.
2. Neglecting to Diversify Investments
Putting all your eggs in one basket, so to speak, can expose you to unnecessary risks or stunt your portfolio growth. As our team has always preached, a diverse portfolio allows you to mitigate downturns in some capacity. If you were to invest all your assets into tech for example, and there was a tech downturn, you would have no protection in your portfolio to diminish the loss.
How to Avoid It:
Adopt a Balanced Portfolio: Diversify your investments across asset classes like equities, fixed income, and real estate to balance risk and reward.
Rebalance Regularly: Periodically adjust your portfolio to stay aligned with your risk tolerance and time horizon.
3. Failing to Plan for Healthcare Costs
Another large blind spot that can happen in retirement planning, is failure to estimate accurate healthcare costs. For those who have not gone through the process with a family member, or have not been exposed to long-term/healthcare costs, it can be quite humbling to be confronted with.
How to Avoid It:
Estimate Healthcare Expenses: Consider the cost of Medicare premiums, out-of-pocket expenses, and potential long-term care needs.
Consider Insurance Options: Look into long-term care insurance or health savings accounts (HSAs) to offset future costs.
Plan for Longer than Needed Care: Not knowing how long your retirement will truly last is always tricky to plan around. Once you can estimate yearly costs, add more years than you think necessary in order to prepare if you live longer than expected.
4. Starting Too Late
The best day to start planning for retirement was years ago. The second best is today. If you know you do not have as much accrued as you need to live comfortably, then it is time to rethink, or even begin, your plan. The power of compounding works overtime, so starting as soon as you can is key.
How to Avoid It:
Start Now, No Matter Your Age: Even small contributions can grow significantly over time. If you’re getting a late start, take advantage of catch-up contributions for retirement accounts like 401(k)s and IRAs.
Automate Contributions: Set up automatic deductions from your paycheck to stay consistent.
5. Ignoring Tax Implications
Failure to consider an unabridged plan can leave you without proper tax planning. One must be aware of such implications when creating their retirement journey, in order to ease the significant bite that taxes can take out of your retirement pie.
How to Avoid It:
Diversify Tax Treatments: Save in accounts with different tax advantages, such as traditional 401(k)s, Roth IRAs, and taxable brokerage accounts, to provide flexibility in retirement.
Plan Withdrawals Strategically: Work with a financial advisor to determine the most tax-efficient order for withdrawing from your accounts.
The Bottom Line
Avoiding these common mistakes can help you create a secure and fulfilling retirement. The earlier you start planning and the more proactive you are, the better positioned you’ll be to enjoy your golden years with confidence.
If you’d like to ensure your retirement plan is on the right track, reach out to schedule a consultation. Together, we can tailor a strategy to help you sidestep these pitfalls and achieve the retirement of your dreams.