The 5 Biggest Retirement Mistakes People Make All the Time

Life, hobbies, work… they can all get in the way of financial planning for retirement. Oftentimes we get distracted and start believing that saving up for retirement can wait until later. Some people think this process is as straightforward as putting money aside or relying on Social Security, but it’s never that easy. 

Financial advisors, time and again, try to inform the public on what and what not to do. Here are the 5 biggest mistakes they see, how to avoid them, and how to think about them in the long run. By following these guidelines you’ll ensure that your retirement years will be enjoyable and fulfilling. 

Getting asset allocation wrong

The world of investing seems daunting, but financial advisors urge us to reconsider this stance. First of all, there’s inflation to consider. If you want to protect some of your money you don’t want your portfolio to consist mainly of cash. Instead, opt for a mix of stocks as you’ll gain more security through them. 

One question that gets thrown around a lot is how much money should you invest? There is no magic number, it all depends on the amount of money you have on hand that you’re comfortable not touching for prolonged periods of time. That means you shouldn’t bank on too much or too little.

Investing too much could put you into the red fast and you don’t want to lose your savings due to over excitement. Invest too little and you’ll have nothing to show for it at the end of the day. If you go for volatile stocks you might end up forced to avoid retirement for a few years so you could build up your finances again. Financial advisors can help set you on your way. 

But, if you’re participating in an employer-sponsored retirement plan, getting in touch with your HR department is another great option as they could connect you to your plan provider. From there, have a discussion about what your long term plans are and how much you’re willing to invest. 

Not participating in a company-sponsored retirement plan

401(k) of 403(b) plans aren’t just places for your money to sit while you wait for retirement. They provide a safe place to store your savings while also being mindful of taxes, sure, but you can get so much more than that if you join a program. 

Your company could offer to match your contributions to the account, essentially meaning that you’ll be getting free money. If your household has money issues then it’s understandable you’d want to focus your funds on where you need it most, but financial advisors think every little help. 

Consider your struggles once you’ll be out of a job. When you’re too old to work, you’ll be thankful for the plans that 401(k)s offer, especially if your former employer also added some cash to the pile. 

Underestimating the true cost of retirement

One of the difficulties of saving up for retirement is knowing what the future holds. While looking at your account you might be happy with the amount you’ve saved, but due to the nature of our ever-evolving market, you might forget to take two things into account: healthcare costs and inflation. 

It’s especially hard to pinpoint where healthcare will take us in the future. Some states have seen a decline in costs while for others, they just keep rising. When calculating how long you think your savings can last you, make sure you take this into account too. 

The average cost of healthcare has also risen. In 2019, it has become as high as $285,000 for seniors 65 and over and according to data, there appears to be a steady increase. 

Also, think about the value of your savings in the future. That’s why we recommend aiming for a mixed portfolio. That way some of your assets will keep pace with inflation. 

Banking on Social Security

If you’ve done your homework when it comes to Social Security, then you’ve probably heard of COLA. More specifically, you’ve likely heard that due to inflation, Social Security is adjusted annually through what is known as a cost-of-living-adjustment. Many households make the mistake of relying on no other types of savings due to this, which can cause a lot of issues down the line. 

Financial experts remind us that COLA doesn’t account for things such as medical care, food, housing or utilities. While inflation might strike these categories, your savings won’t see much of a change. 

Your own savings will play an important role in your financial security in the future. To put it into perspective, in 2019 alone, seniors took home  $17,652 annually through Social Security. From federal poverty guidelines, we also know that income at the poverty level for a one-person household rests at around $12,490. With a difference of only $5,162, we recommend you consider Social Security as a backup instead of your primary income during retirement. 

Withdrawing retirement funds too early

Financial advisors see people withdrawing their retirement funds too early for several reasons. Sometimes it’s in order to cover the costs of an emergency but other times they use the money to buy a new house, pay for schooling or even to support other individuals, particularly adult children. 

First, you need to know what your full retirement age is, which is based on the year you were born. Secondly, every household needs to weigh the pros and cons of these transactions. And let us tell you, the cons always outweigh the pros. It might not seem like it, especially if you’re in an emergency, but that’s why we recommend you save money on the side for unforeseen circumstances alone. 

The benefit of not withdrawing your Social Security before the age of 70 is that your savings will increase by 8% for every year you delay (again, keep your full retirement age in mind). If you decide to still go through with it, here’s what will happen: 

  • You will lose your compound interest ( which is a significant way of growing wealth).
  • You will be put in a higher income tax bracket.
  • You might suffer monetary penalties.
  • You might lose 30% of your potential benefits for the rest of your retirement. 

So, if you think you might ever be in a situation where you have to withdraw, plan out your savings accordingly starting today!

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