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The 7 Retirement Planning Mistakes You Can’t Afford to Make

Updated on May 25th, 2022
retirement strategy

Unless you’re a financial advisor, the idea of planning for retirement probably doesn’t get you excited. However, if you want to enjoy a comfortable life down the road, you have to be intentional about this aspect of personal finance. It doesn’t seem urgent when you’re 25, 35, or even 40, but it’ll be critically important when it comes time to actually retire. And considering that retirement planning takes decades, it’ll be too little too late. Today we’re going to walk you through a few retirement planning mistakes you can’t afford to make.

The Sad State of Retirement Planning 

You won’t see a feature story on the evening news. You won’t even hear about it in most finance classes these days. Unfortunately, the sad state of retirement planning in the U.S. gets very little meaningful coverage. For everyone’s benefit, let’s review some facts:

  • The average American retires at age 63 and enjoys an 18-year retirement. However, many retirements last much longer – closer to 30 years, in fact. Thus, you should be planning on a 30-year retirement if you want to be on the safe side.
  • If you expect to draw $5,000 per month for 30 years, you’ll need roughly $1,060,751 in savings (accounting for investment returns and inflation).
  • The average 50-year-old American has just $42,797 saved for retirement, while 40 percent of all Baby Boomers have nothing saved.
  • 4 out of 5 Americans between the ages of 30 and 54 believe they won’t have enough saved for retirement when the time comes.
  • 36 percent of Americans over the age 65 are totally dependent on Social Security, which is supposed to be a source of supplemental income.

Most people are taught that it’s good to spend, spend, spend and accumulate debt. Saving is for nerds, they say. And while spending might be more fun – and certainly provides a rush of excitement – this sort of satisfaction is fleeting. Saving might not provide any immediate joy, but there’s long-term satisfaction attached to financial stability. 

7 Retirement Planning Mistakes You Can’t Afford to Make

As the data shows, some people ignore retirement altogether. Other people think they’re planning for retirement, when they’re really just weaving a tangled financial web that will eventually come back to haunt them.

As you look towards retirement, here are some mistakes you don’t want to make.

  1. Not Saving Anything At All

The biggest retirement planning mistake is doing nothing at all. There are far too many people who don’t think about retirement planning until it’s too late. Or if they do think about retirement planning, they’re banking on Social Security, winning the lottery, or collecting on a relative’s estate. Sadly, none of these things are guarantees. Social security may run out, winning the lottery is highly improbable, and your parents may blow through all of their money before passing.

The amount you save isn’t nearly as important as the fact that you’re putting away a small amount of money each and every month from an early age. Plug some numbers into this Roth IRA calculator and see how simple it is.

Even if you only put away $100 per month starting at the age of 30, an average rate of return would leave you with roughly $282,000 at age 65. If you started at age 25 and increased the monthly contribution to $200 per month, you’d have somewhere north of $883,000. It’s a no-brainer! 

  1. Failing to Set a Retirement Goal 

Whether you’re trying to lose weight, get a degree, grow your business, or become a better parent to your kids, goals are vital. Sadly, a lot of people make the mistake of not setting retirement planning goals. 

It’s hard to chase after something for 30 or 40 years if you don’t have a goal you’re reaching for. Saving for retirement is one thing. Trying to save up $2.5 million by the time you are 65 is much clearer. You might not get there, but the fact that you have a goal makes it much more likely.

The best way to set a retirement goal is to sit down with a financial advisor and put everything on the table. By reviewing your financial situation and identifying where you want to be when you’re at retirement age, you can set proactive goals and make smarter choices both now and down the road. 

  1. Withdrawing From Retirement Accounts

After making the conscious effort to put money into a retirement account and let it grow tax-free, one of the biggest mistakes you can possibly make is withdrawing prematurely. But believe it or not, this is exactly what many people do with their hard earned 401(k)s. 

“Any withdrawals before the age of 59 years and 6 months attract a 10% penalty, receivable by the federal government and you will have to pay taxes on the amount you claim along with withholding,” Debt Consolidation Help explains in this blog post. “For instance, if you want to withdraw $20,000 from your 401k account, you will end up paying something around $28,000 which comprises the 10% penalty and 25% withholding charge to get it in hand.”

There’s almost always a better option than withdrawing early from a retirement account. The only times you should ever consider withdrawing prematurely – and it’s still not a good idea – is if you have a serious illness that requires money for medical expenses, or you’re at risk of losing your home to foreclosure. 

  1. Spending Instead of Rolling Over 

When switching jobs, you have the option of rolling over your employer-sponsored retirement account into another account – either with your new employer or an independent account that you’ve set up on your own – or cashing out. According to retirement expert Jack Vanderhei, 70 percent of workers who switch jobs in their 20s cash out instead of rolling over, while 55 percent of workers in their 30s make the same mistake.

Not only does cashing out have stiff penalties (as discussed in the previous point), but it also sets you back and requires you to start over with a retirement balance of zero. Rolling over can sometimes be a headache, but buckle down and do it. It’s a much wiser way to manage your money. 

  1. Being Too Conservative Early On

One of the more prevalent retirement planning mistakes is being too conservative early on. It’s okay if you’re not particularly thrilled by the thought of risk, but you can’t 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. Don’t 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. 

  1. Believing You’ll Work Forever 

There’s a percentage of the population that finds great fulfillment in work. In fact, it’s their job that keeps them going. If you fall into this group, you might be tempted to think you’ll work forever. While people do sometimes work their entire lives by choice, don’t bank on this. Whether for health or personal reasons, it’s likely that you’ll eventually clock out for the final time and enjoy a more peaceful existence at home.

What’s going to happen if you eventually do want to retire and you don’t have any money stashed away in a retirement account? Sure, you’ll have a Social Security check, but that’s not something you want to stake your entire livelihood on.

  1. Not Planning for Healthcare 

There’s more to retirement planning than IRAs and 401(k)s. You also need to think about practical things like healthcare. Someone turning 65 today has a 70 percent chance of needing some sort of long-term care services in their remaining years. The average woman will need 3.7 years of care, while men need 2.2. And if you aren’t familiar with long-term care costs, they can be expensive. A room in a private facility can cost well over $100,000 per year.

One smart part of retirement planning is purchasing insurance to protect your nest egg and care for your health needs should a situation arise. Long-term care insurance is very affordable and should be purchased while you still qualify for low rates. If you’re over the age of 50, it’s time to start thinking about it.

Get Your Retirement on Track

Your retirement is too important to take lightly. It’s not something you put off until you’re 40 or 50 and the reality of life after work begins to set in. It’s also not something you can plan for blindly. A poor plan is almost as bad as no plan at all. It could even be more dangerous!

No matter what age you are – 25 or 65 – it’s never too early or too late to work on retirement. By avoiding costly mistakes and focusing your energy and attention on smart, practical steps, you can begin paving the way for a brighter financial future.

Are you ready to dig in and get started?

Serenity Gibbons

Serenity Gibbons

Local Unit Lead for NAACP in Northern California with a mission is to ensure the political, educational, social, and economic equality of rights of all persons and to eliminate race-based discrimination. I enjoy writing and interviewing people making a difference in the World. Former Assistant Editor NY Times. NYU Alum living in sunny California.

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