10 Biggest Retirement Planning Mistakes


Downsizing Your 401 Contributions While Youre Working

Biggest Retirement Mistakes – And How To Avoid Them

Unusually large tax bills in our household forced us to scale back on contributions to our retirement savings last year. Thats an area to tread lightly in, financial experts note.

If thinking of decreasing how much they are currently saving, make sure you choose very carefully and ensure youre taking advantage of any employer match that you might be eligible for, and, save at least enough to get that match, says Murphy. Thats money that your employer is willing to give you, and we wouldnt want people to miss out on that benefit.

Many retirement plans offer the option of automatically increasing your savings rate. Check that box that you increase at some point in the future, says Murphy. That might be helpful to make sure you get back on track with your retirement savings.

Mistake #: Carrying Debt Into Retirement

With no source of income and a limited pool of funds, carrying debt into retirement can be difficult to manage. Although most people plan for loan repayment through their regular income sources, it is crucial for them to plan for the repayment of such a loan in the unfortunate event of their absence. With a plan like ICICI Pru Guaranteed Pension Plan, your family can avail the entire purchase price2 used to buy the plan in case of your absence to pay any sort of outstanding loans.

Misunderstanding Social Security Benefits

Social security plays a big part of most peoples retirement plans. Many people are confused about when they should start claiming their benefits, how benefits are determined, and what they can expect in the future. Theres no foolproof way to estimate social security benefits before retiring, but creating an account at www.ssa.gov provides access to estimated benefits.

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Claiming Social Security Too Early

You’re entitled to start taking retirement benefits at 62, but you might want to wait if you can afford it. Most financial planners recommend holding off at least until your full retirement age 67 for anyone born after 1959 before tapping Social Security . Waiting until 70 can be even better.

Let’s say your full retirement age, the point at which you would receive 100% of your benefit amount, is 67. If you claim Social Security at 62, your monthly check will be reduced by 30% for the rest of your life. But if you hold off, you’ll get an 8% boost in benefits each year between ages 67 and 70 thanks to delayed retirement credits. There are no additional retirement credits after you turn 70. Claiming strategies can differ for couples, widows and divorced spouses, so weigh your options and consult a professional if you need help.

“If you can live off your portfolio for a few years to delay claiming, do so,” says Natalie Colley, a financial analyst at Francis Financial in New York City. “Where else will you get guaranteed returns of 8% from the market?” Alternatively, stay on the job longer, if feasible, or start a side gig to help bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.

Being Too Conservative Early On

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One of the more prevalent retirement planning mistakes is being too conservative early on. Its okay if youre not particularly thrilled by the thought of risk, but you cant be totally risk-averse when saving.

If you start saving at the age of 25 or 30, you have 30-plus years for your money to grow and mature. In other words, you have the luxury of taking on high-risk, high-reward investments. Dont be foolish, but recognize the long-term play. As you get closer to retirement, you can scale back the risk and switch your portfolio to more stable growth stock mutual funds and reliable stocks and bonds. For now, open up your options.

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Not Having Cash Or Assets Saved Up Outside Of Retirement

One thing I’m doing now is planning for potential pop-up emergencies or costly purchases so I don’t have to withdraw from any of my retirement accounts. Financial planner and CPA Taylor Jessee said it’s important to save outside of retirement accounts in case a money-draining moment happens in your life.

“If there is a financial emergency, you don’t want your 401 or IRA to be the only place to go for cash,” said Jessee.

Jessee said that when you dip into your 401 for things like car breakdowns or surprise home repairs, you’re robbing your future self of market gains, interest, and dividends that you could have earned.

“Also, you will likely owe taxes plus a 10% penalty if you’re under 59 and a half, which digs the hole even further,” Jessee added.

Paying Off Debt Before Saving For Retirement

When faced with the prospect of saving for the future or paying down debt, many people struggle to determine which takes precedence.

Because time is crucial when planning for retirement even if its a few decades away its best to devise a strategy that allows you to pay down debt while still saving for retirement.

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Mistake : Having Only One Form Of Savings

The biggest key to a successful retirement is diversification. Yet, its the biggest mistake that people often make, as they tend to rely solely on their EPF savings when they retire.

In 2021, more than half of EPF members were unable to save enough to meet the minimum recommended savings amount of RM240,000 for retirement.

And while EPF is considered a steady retirement fund with its current rate of 6.10% per annum, it should not be your only source.Tips: Diversify your savings by investingYour savings and investing approach should not stay the same as you progress from your 20s to your 40s, as your risk tolerance and financial commitments change over time.Even if you are contributing to a mandatory retirement fund like EPF, consider spreading your retirement savings into other investments that generate long-tern, consistent, and competitive returns with minimal risk.

Inflation Isnt Dead Its Just Taking A Short Nap

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Todays inflation rate is so low its almost off the radar screen. Only a few people weve talked to are planning for it. Most of us will probably live to see 7% to 8% inflation again. This means retirement assets and withdrawals might be worth 30% less over a 15-year period than they are worth today. Getting pummeled by inflation is absolutely avoidable, but most people will get zapped!

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Retirement Mistake #: Tapping Into Retirement Accounts Early

Its often assumed, once you retire, your spending will magically plummet, along with your income tax. That may be true to a degree.

Depending on how you plan it, you could find yourself in a lower tax bracket in early retirement, and there may be many costs you can cut once your time is your own.

That said, youre also likely to encounter significant expenses you must plan for in life after retirement. For example:

  • You may incur new costs related to healthcare and long-term care insurance.
  • You may still want to spend as much or more on your favorite leisure-time activities.
  • While your earned income may decline, judicious tax planning may warrant deliberately incurring some taxable capital gains in early retirement, to reduce your tax burden in the long run.
  • It may be time to revisit your sources for emergency funds.

How will you cover these and other expenses, potentially for decades?

It can be a mistake to promptly swap out your paycheck for all those tax-sheltered assets youve been building for years. Like a jigsaw puzzle, your retirement spending pieces may at first seem like a random assortment. But they can form a complete picture if you take the time to put each one in its proper place.

For example, there are your main investments, 401 plan assets, IRAs, Roth IRAs, and Health Savings Accounts . Theres Social Security. If youre lucky, there may be a pension plan or two.

Retirement Mistake #: Retirement Planning By Any Other Name

What if youre not the retiring type? Does this paper still apply to you?

Yes, it does!

Not everyone ends up retiring. Berkshire Hathaways Warren Buffett, age 90, and his 97-year-old sidekick Charlie Munger are still going strong. Madeleine Albright, age 83, just published her most recent book last year.

82-year-old Nobel laureate and financial economist Eugene Fama once wrote:

I love my work. I have no intention of stopping as long as Im breathingand I may even do it after that.

Good for them. But even if you, like them, are planning to work until you run out of breath, it still makes sense to strike an appropriate balance between spending as abundantly as you can today, while preserving enough wealth for you and your loved ones to enjoy in the future. As such, you can apply these same retirement mistakes to your ongoing planning.

Would you like to continue this retirement conversation with us directly?

To help potential clients make an educated and informed decision about our firm, weve designed a no-cost, no-obligation five-step process we call Sleep On It.

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Mistake #: Ignoring Healthcare Expenses

Retirement is the golden age, but it is also the age that is most susceptible to critical illnesses and health issues. As you grow old, the risk of critical illnesses and your healthcare related expenses will also increase. Paying for even these critical expenses can put a significant dent on your savings. Therefore, having an insurance becomes a must at this age.

Withdrawing From Investment Accounts In A Down Market

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I’ve started to monitor my retirement investment accounts daily, and when the market goes down, I start to wonder if I should withdraw my money or move it elsewhere. Financial planner Adam P. Scherer said that’s a common, but potentially costly mistake.

“Known as ‘sequence of returns risk,’ this potential retirement pitfall can quickly erase years of gains and places the success of one’s retirement strategy at risk,” said Scherer. “Having at least two years of liquid, safe funds available that can be accessed during market downturns can help to offset this retirement risk.”

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Youre Probably Going To Live Longer Than You Think

Most investors weve spoken with assume theyll hit their mid-to-late 70s. Nobody seems to realize that average life expectancy is now about 84. This means that a lot of people will live even longer, perhaps even to the early 90s. Great, you say? Well, not if your retirement assets only last until age 75. Planning for a longer retirement is critical for most investors.

Not Planning For Tax Implications

When implementing retirement planning its important to consider tax implications and what works best with your financial situation now and in the future.

What tax bracket will you fall into after you retire? Is it best to pay taxes on the front-end or when you withdraw? These are questions to consider and discuss with a tax advisor.

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Not Having A Financial Plan

To avoid sabotaging your retirement and running out of money, create a plan that considers your expected lifespan, planned retirement age, retirement location, general health, and the lifestyle you would like to lead before deciding on how much to set aside.

Update your plan regularly as your needs and lifestyle change. Seek the advice of a credentialed financial planner to ensure your plan makes sense for you.

Not Implementing Estate Planning

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While estate planning is an ongoing strategy, there are common documents that are part of it: a Will, Living Trust, Powers of Attorney for your assets and healthcare directives, customized tax planning and other more complex components of a customized Trust.

The overarching goal is to protect your assets on the journey to retirement and to make sure that your wishes are carried out after you die, so that your loved ones have an easier process and your assets are maximized.

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Lack Of Preparation For Anticipated Medical Expenses

Remember that Medicare only covers 80 percent of most expenses. Medical bills can become quite substantial hospital stays, medications or surgeries can be crushing to your retirement savings. Do you have a Medicare supplemental policy in place to pick up most of the remaining copays? Will insurance or savings be enough?

Having Unrealistic Expectations For Retirement

Consider the true costs of retirement and be honest about the following:

What kind of lifestyle you want Your travel plans Your business goals Whether youre planning on helping your children or grandchildren with expenses

Draft a retirement budget thats realistic and assess whether you need to make sacrifices now to achieve your future financial goals.

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Putting Your Money In Variable Annuities

Variable annuities can offer some benefits, according to the U.S. Securities and Exchange Commission. For example, these annuities make it possible to receive regular payments throughout the rest of your life. They also have a death benefit, meaning that if you die before you started receiving payments, your beneficiary can receive a specified amount. Finally, variable annuities are tax-deferred, so you wont have to pay taxes on income until you withdraw the money.

But in comparison to other mutual fund options, variable annuities can cost 50% to 100% more in fees and surrender charges, according to Financial Mentor. Further, the gains on these accounts are taxed as normal income not at the lower capital gains rate upon withdrawal.

Retirement Planning Mistake : Spending Too Much Or Too Little

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According to a study by J.P. Morgan Asset Management, the average retirement plan sees withdrawal rates exceeding 20% per year during the early phase of retirement.

This will deplete savings way too fast and is a critical mistake. There isnt a financial planner alive that would tell you that 20% is an actuarially sound spending rate, but the sad reality is most new retirees arent very good actuaries.

According to Fidelity Investments, the odds of one spouse living past the age of 90 are roughly 50/50, meaning you must plan for 30+ years of retirement. Your health and genetic makeup may lengthen or shorten that time-frame. Increasingly long life expectancy reduces the percent of savings you can spend each year because your savings must last longer.

We have some control over when we retire. However, we have very little control over how long we live. Gordon Smith

Experts generally agree that your withdrawal rate from savings should approximate 4% per year , but even that rule of thumb is subject to some controversy.

Another school of thought lead by Wisconsin financial planner Ty Bernicke claims that retirees spend less as they get older, largely offsetting inflation expectations and increasing the rate of withdrawal from savings that’s actuarially sound.

His position is the 4% rule of thumb unnecessarily impoverishes retirees and he has solid numbers and logic to support this claim.

The future is unknowable.

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Retirement Planning Mistake 1: Paying Too High Investment Expenses

The cost of investing is greater than most people understand.

When investing in mutual funds, most people see only the management fee which averages close to 1.5% for equity funds.

What they dont see are portfolio turnover costs, hidden sales charges like 12b-1 fees, and other hidden charges because the portfolio is under-invested, etc. The costs you dont see can easily double the costs you do see, making the 1.5% closer to 3%.

These costs are one of the prime reasons why most actively managed mutual funds consistently under-perform their passive index cousins. Costs are like a tax that must be overcome before any money flows into your pocket.

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If you think this problem is isolated to mutual funds, then read on because the same logic applies equally to other investments. For example, you may notice the commission paid when buying and selling stocks or bonds, but you dont see the bid/ask spread and dealer markup which can easily cost more than the commission. Again, these are hidden costs.

Only pay for value added services. Beware of hidden costs associated with certain investments.

The rule is simple: only pay for value added services. If you hire a broker or manager who charges 1% per year then s/he must add more than 1% per year to your portfolio compared to passive index investing to justify the fees.

Your job is to secure your retirement not his.

Taking On College Debt

What about the kids? Arthur Ebersole, a CFP at Ebersole Financial LLC, in Wellesley Hills, Massachusetts, sees parents take on too much debt to fund their childrens college because they did not save enough in their 529 plans. They take out home equity loans or other debts that they may be unable to pay off before retirement. Mortgages and college loans put a significant drag on monthly cash flow, especially for those on a fixed budget, he says. Instead, have your kids take loans in their names, and help them with payments as much as you can or wish to. Marguerita Cheng, mother of three, and a CFP at Blue Ocean Global Wealth in Gaithersburg, Maryland, concurs. Some parents are afraid to have the conversation with their student and school about the right financial fit. But you dont want to compromise your own financial security.

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