Common Retirement Mistakes and How To Avoid Them
Retirement is one of the most common but complex planning goals. That’s why it’s important to put yourself in the best possible position to retire on time and successfully achieve your goals. Learn more about mistakes that can derail your plans and how to avoid them.
- Written By Stephen Kates, CFP®
Stephen Kates, CFP®
Stephen Kates is a Certified Financial Planner™ and personal finance expert specializing in financial planning and education. Stephen has expertise in wealth management, personal finance, investing and retirement planning.Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.Read More
- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, is a senior financial analyst with over 25 years of experience in financial research. His knowledge spans researching and analyzing financial data to developing a one-of-a-kind viewpoint on money-related topics.Read More
- Updated: February 22, 2023
- 7 min read time
- This page features 5 Cited Research Articles
- Edited By
- Beginning to plan for retirement early in your career will make saving and avoiding setbacks easier.
- Tax management strategies considered during your career will pay off in retirement.
- Avoiding too much risk in the form of debt and risky investments close to your target retirement date will make for a smooth transition from working to retirement.
- Hope for the best but plan for the worst when considering medical and long-term care needs.
Waiting Too Long To Start Saving
It can be difficult to prioritize retirement-specific saving early in life for numerous reasons. Low income, student loans or other priorities like travel can all trump the far-off vision of traditional retirement at 65. However, the longer you wait to begin saving for retirement, the harder it can be.
Consistent retirement saving is as much about building good financial habits as it is about building wealth. The later you begin saving, the greater the pull of other commitments for that money will be.
Unfortunately, life can become more complicated with marriage, mortgages and children. Committing even a small portion of your income towards a retirement plan like an employer-sponsored 401(k) or a personal IRA can build that habit and start to reach that retirement goal.
Time is also a future retiree’s biggest asset. Utilizing the power of compounding can turn a small contribution into a large sum after 30 or 40 years of growth.
For example, to save $1,000,000 for retirement by 65 years old, it would take $381 per month at age 25, compounded monthly. If you started to save at age 40 instead, it would take $1,234 per month (compounded monthly) — which is more than three times the amount. This is based on a constant 7% growth rate.
While it may be harder to put away $381 each month at age 25, any amount will place you farther ahead than nothing and it can reduce your savings burden later in life.
Poor Tax Planning
As the saying goes, “It’s not what you make, it’s what you keep.” By minimizing current and future taxes, you will keep more of your hard-earned money for the goals you want to spend money on.
Utilizing tax-efficient retirement accounts such as 401(k)s, 403(b)s and IRAs can be both a powerful savings tool and a smart tax strategy. While no one knows what tax laws will be in the future, it is possible to allocate money towards different accounts at different times to make the most of the tax benefits.
- 401(k) and 403(b)
- Employer-sponsored plans such as 401(k)s and 403(b)s offer the highest possible salary deferral options for employees. In 2023 these contribution limits will be $22,500 (or $30,000 if you’re over age 50). This allows workers to defer a significant amount from taxes if contributions are made pre-tax. If a Roth 401(k) is used, the same contribution limits are allowed, but all money will be contributed post-tax.
- Roth IRA
- Roth IRAs allow a contribution of $6,500 (or $7,500 if you’re over age 50), and all money contributed will be post-tax, meaning the withdrawals will be tax free. Due to the income limits on Roth IRAs, contributing when you’re young and have lower income and taxes will mute the impact of paying taxes on the contributions.
- Traditional IRA
- Traditional IRAs allow a contribution of $6,500 (or $7,500 if you’re over age 50). There is no income limit to traditional IRAs, but the tax-deferral benefits do get phased out beginning at $138,000 for single filers and $218,000 for joint filers. Above these ranges, the tax benefits can wane, and it can be savvy to explore more complex retirement savings strategies such as Backdoor Roth contributions.
It is worthwhile to discuss your tax planning with a financial advisor or CPA prior to retirement to make sure your plan is sound, and you are not leaving any available strategies on the table. Planning your distributions in a tax-efficient manner can be just as important as planning your contributions.
Getting Into Debt
Entering retirement with debt or getting into debt in retirement can make the calculations on your retirement plan a little tougher. Most people have a tighter budget and fixed income during their retirement, and the higher your essential expenses, the more challenging it can be to balance other costs and goals. Your most precious asset is your cash flow, and debt payments can eat into that.
For retirees who may have most of their money tied up in their homes, it can be tempting to borrow against the property to fund a retirement. Consider your situation carefully and seek the counsel of a professional advisor before taking on additional debt payments. If you need to tap into that money, consider downsizing before committing to a loan. Interest may not be deductible, which further limits the benefits of tapping your equity through a loan.
Not Investing Wisely
One of the most dangerous mistakes can be investing inappropriately for your target retirement date. Although it is prudent to invest aggressively while you have many years or decades left to accumulate assets, it is essential to manage risk as retirement approaches.
Financial professionals recommend that investors begin to reduce their risk tolerance (and their equity exposure) as early as 10 years prior to retirement to mitigate damaging losses from downturns or recessions.
The first step towards properly managing your risk is to understand how you are invested. If you have assets spread out across multiple accounts at multiple companies, it can be challenging to monitor and rebalance them all. Dedicating your attention to the types of investments your accounts hold will allow you to make changes at the right time for your goals.
While counterintuitive, the best time to reduce your exposure to risky investments is when the market is performing well. Moving into a more conservative portfolio when asset prices are rising may leave some growth on the table, but it will allow you to be properly protected from a future drop in asset values. It is better to be protected than sell after your assets have fallen in value. One of the best ways to build wealth is to avoid significant losses.
Ignoring Long-Term Care Needs
It is easy to imagine the good health we have today will remain later in our lives. But unfortunately, a significant portion of retirees require dedicated care due to old age. Maintaining a good diet, exercise and preventive care routine will go a long way to keep you healthy, but it cannot prevent the need for special care during your later years.
Genworth reports that “seven out of 10 people will require long-term care in their lifetime.” Additionally, using 2021 data, the national median cost for monthly assisted living facilities is $4,500. For home care, it can be between approximately $4,900 to $5,200 per month.
Preparing for the possibility of long-term care for yourself or a loved one is a prudent planning strategy. Speak to a financial advisor or an attorney to understand more about your specific situation and how to prepare for care costs.
Not Planning for Emergency Costs
It may seem like you can dispense with the typical emergency fund in retirement since you want to commit money toward investments that can produce income — but this couldn’t be further from the truth. It is more important than ever to maintain an emergency fund that can act as a safety net in times of market turmoil or during periods of higher-than-expected expenses.
Vanguard recommends that the typical three to six months’ worth of expenses may not be enough for retirees since they depend on their portfolios for substantial income. Many financial planners use a benchmark of 12 months of expenses or more for early retirees as they begin to get a feel for their spending habits and their needs.
For retirees who have a substantial percentage of their income from guaranteed income sources such as social security, pensions or annuities, an emergency fund will act as the buffer when your expenses outpace your income.
It is also important to remember that replenishing your emergency fund after use is a necessary step for the next time you may need that cushion to be available. Before committing to a certain amount, speak with an advisor who understands your situation and can recommend a strategy for you.
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5 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Wells Fargo. (2023). Five Retirement Mistakes To Avoid. Retrieved from https://www.wellsfargo.com/financial-education/retirement/avoid-mistakes/
- Internal Revenue Service. (2022, November 21). Taxpayers Should Review the 401(k) and IRA Limit Increases for 2023. Retrieved from https://www.irs.gov/newsroom/taxpayers-should-review-the-401k-and-ira-limit-increases-for-2023
- Genworth Financial. (2022). Cost of Long-Term Care by State | Cost of Care Report. Retrieved from https://www.genworth.com/aging-and-you/finances/cost-of-care.html
- Bob Niedt. (2020, April 10). 16 Retirement Mistakes You Will Regret Forever. Retrieved from https://www.kiplinger.com/slideshow/retirement/t047-s001-retirement-mistakes-you-will-regret-forever/index.html
- Vanguard. (2018). What’s The Right Emergency Fund Amount? Retrieved from https://investor.vanguard.com/investor-resources-education/emergency-fund/whats-the-right-emergency-fund-amount
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