Top 5 Retirement Mistakes and How to Avoid Them

Retirement Mistakes To Avoid

While everyone’s financial situation is relatively unique, people tend to make the same mistakes when they are accumulating retirement assets inside and outside qualified retirement plans.

Here are the five most common retirement saving mistakes:

Mistake #1: Overspending is a Bad Habit

Undisciplined spending can result both from misjudging your current financial position and from failing to properly estimate how much you need to save for your future use. Typically, overspending is seen as spending more than you make, which can result in the accumulation of dangerous amounts of expensive debt, in particular credit cards.

However, a form of overspending that is less commonly understood is the danger of underestimating how much you’ll need in retirement so you end up spending too much today. While it’s true that a person’s expenses often decrease when they retire, rising longevity and the rapidly increasing cost of healthcare and other necessities can cause your expenses to be much higher than you might think they will be after you are retired. 

While you may believe your current spending patterns are reasonable and not excessive, if you underestimate how much you will spend in retirement, your current expenditures may in fact be placing your retirement plans in peril. Don’t jeopardize tomorrow by overspending today – make sure that your spending habits are based on a carefully calculated estimate of how much you need to save to protect your desired standard of living during retirement. 

Key to accomplishing this is the combination of spending discipline and accurate forecasting of your future spending needs. Both factors are important when it comes to ensuring that your current spending doesn’t endanger your ability to live the lifestyle you want to live in retirement.

fingers flipping through 100 dollar bills

Mistake #2: Failing to Adequately Plan for Retirement

Flying blind when it comes to your retirement can seriously imperil your ability to retire when you want to retire and how you live during retirement. Some people are afraid of the process because they don’t want to know the answers. Others worry that the development of a plan will take a lot of time and requires specialized expertise. Others may procrastinate and wait too long to start the planning process. Too many people avoid retirement planning for fear it will force them to reduce their current standard of living. The naive solution is to simply assume existing assets in 401(k)s and IRAs, or future Social Security benefits will provide sufficient income for them to live well after they retire, thereby eliminating the need for retirement planning. 

Hands Holding Retire Plan Matching Jigsaw Pieces

However, unless you have run the numbers to ensure that your income from Social Security and other sources will meet your needs, you run the risk of failing to produce enough income to adequately fund your retirement. Planning is critical if you want to live well during retirement

A person who has saved for retirement without considering exactly how much they will need to live their preferred lifestyle when they retire may find that the amount they have saved falls short of what they need. A financial planner can be helpful in this regard by helping you perform a “dry run” that enables you to model both how much money you will need to be able to afford to retire and how much in savings you need to set aside to get there. The sophisticated financial planning software many advisors use can provide you with a graphical representation of the impact your saving and spending choices are likely to have on your retirement plans.

Drawing up a plan enables you to not only accurately set aside enough from your current earnings to reach your retirement objectives, but also to make adjustments as necessary if circumstances should change. For instance, if the stock market performs better or worse than expected, this could have an impact on the amount of money you need to save. The same applies if your financial circumstances change for any reason. 

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Mistake #3: Paying Undue Attention to What Your Friends and Family are Doing

Everyone has heard the cautionary tales about buying a stock just because other people you know are buying it. While doing so may pay off every now and then, unless you fully understand the company and its prospects, as well as the risks involved, the likelihood is that buying stocks this way is not going to produce long-term success. The same applies when it comes to investing for retirement based on what your friends and family are doing.

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It’s not that the people you know are necessarily making bad investment decisions – the point is that the approach that is right for them may very well be wrong for you. For instance, a friend of yours may take a high-risk, aggressive approach to investing for retirement with a large portion of their assets because they have family wealth or other money they can access in retirement as a back-up plan. Taking this same approach if you don’t have other assets to fund your retirement could be disastrous if the risky investments you select decline in value.

Woman whispering to her friend

Everyone’s financial situation is different – you are better off mapping out what’s right for you when you develop your retirement plan rather than trying to copy what worked for someone else. While there’s no harm in being aware of the approachs other people are taking to saving for retirement, in all cases the final determinant of the retirement plans you draw up should be whether they work for you, not how well (or poorly) they have performed for others.

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Mistake #4: Not Considering What Will Happen in the Next Phase of Life

It’s difficult to make accurate financial decisions about retirement when you aren’t sure what the next phase of your life will entail. The possibilities are, if not endless, certainly extensive: traveling the world, moving to your dream location, working on charitable causes, enjoying a life of leisure, etc. People need a purpose in life, whether they are retired or working, and if you fail to take this into account when making retirement savings plans their can be serious problems later in life.

phases of life

If you enter retirement not knowing how you want to spend your time, you may find that you haven’t saved up enough money to do what you really want to do whenever you finally figure out what that is. This is not to say that you shouldn’t leave room for discovering new things you’d like to do and places you’d like to go when you retire – it is to say that it makes sense to consider the type of retirement lifestyle you want to live when you make financial plans for retirement. This is because your lifestyle choices in retirement will most likely be funded, for the most part, by the funds you have saved for that purpose during your working years. Thus, giving some thought to how you will handle this new phase in your life so you will have a retirement plan that supports that lifestyle.

In this regard, it is important to pay close attention to the social aspect of retirement. Some retirees move to be closer to family, others want to live in communities that offer ample opportunities for social interaction. To maximize your chances of being able to follow the path of your choice in retirement, giving adequate thought to what that path is likely to be prior to retiring is an important step that will enable you to develop a retirement plan that will most likely make your desired lifestyle a reality. 

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Mistake #5: Believing That Current Market Trends Will Continue into Retirement

While it’s tempting to simply project current market trends into the future when it comes to projecting investment performance, this is a mistake that can significantly impair your ability to reach your retirement objectives. What happens if a market downturn occurs just before you plan to retire? If you haven’t stress-tested your retirement plans to take into account the possibility of such a scenario occurring, you could find yourself needing to delay your expected retirement date as a result of a serious market decline. 

A comprehensive retirement plan requires considering a variety of scenarios with regard to market performance. Conducting such an analysis allows you to take into consideration your options if the market were to experience a significant downturn and make plans accordingly. A financial planner can help you model a variety of scenarios to determine what plan is best-suited to your time horizon, investment objectives, and risk tolerance. 

By viewing the impact of various market performance scenarios on your retirement plans, you can take steps to protect them from changes in market trends. For instance, if the analysis shows your preferred retirement date would be delayed by a market downturn, you can take steps to change your asset allocation to reduce the impact of a falling market or you could increase the amount of money you set aside for retirement as a means of improving your chances of weathering a market storm without having to delay your targeted retirement date. 

Wall Street sign, downtown Manhattan, New York City

Over the long run, the stock market is a powerful way to build additional wealth. However, its higher returns over extended periods of time as compared with more conservative investments such as bonds and certificates of deposit (CDs) comes with greater volatility than is the case with less risky assets. As a result, when drawing up a retirement plan it is essential to consider both the risk and reward of investing in stocks, and to evaluate how a change in market conditions might impact your retirement.

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