Retirement is a big deal. Reaching a financial position where you can retire securely and in comfort takes years of planning and saving.
Do you know how much you truly need to retire comfortably? Do you understand the tax implications of the payments you are expecting in retirement? Have you estimated your expenses properly?
There are a lot of moving parts involved in effective retirement planning. That means it’s important to focus on key indicators of your progress toward retirement, like the questions asked above. Everyone’s situation is unique when it comes to retirement, so it’s crucial to have a firm grasp of where you stand.
At the same time, you need to be aware of and work to avoid common retirement mistakes.
Unfortunately, making some retirement mistakes can set you back years and force you to work longer than you planned. These mistakes can even force you to go back to work or depend on others to help you pay your bills.
The good news is that these mistakes are generally avoidable as long as you understand them. The below mistakes are very common, but you can plan around them with some forethought.
Retirement Mistake #1: Not Having a Plan
Many people make the mistake of failing to plan for retirement altogether. They assume that they can live off of their Social Security payments or that their loved ones will step in and address their financial needs.
Relying on others, especially when you only assume they will help or support you without any kind of commitment on their end, is one of the worst retirement plans you can make. These types of plans are really the equivalent of not having a plan at all.
Having a plan will help you take steps to address these common retirement questions.
- How much do I need to retire?
- How will my retirement distributions be taxed?
- Do I have what I need to manage my retirement accounts effectively?
- What age can I retire?
- How much should I have saved by now?
- Am I on track for my retirement plans?
- What expenses will I have in retirement?
The answers to each of these questions will either affect how you should plan for retirement or what additional action you need to take to be sure you can retire in comfort. A financial advisor can help you answer these questions and build a strategy that supports financial security in retirement.
Now, let’s address some common reasons why individuals forgo retirement planning.
Planning to work indefinitely
Planning to work for the rest of your life, even if you love your job, is not a good or realistic idea. Even if you do not want to retire, you may be forced to take that step at some point in the future.
Baby boomers, in particular, are more prone to report that they plan to work after age 65. However, the U.S. Department of Labor Statistics reports that, as of 2022, roughly one in four Americans ages 65-74 are employed. Additionally, only 8.2% of Americans age 75 and older are employed.
There could be a lot of reasons that this is the case, from voluntary retirement to health issues. Although you may plan to work forever, the likelihood that you actually do is small. Even if you continue to work, you may not work the same number of hours or earn the same salary as you do in your prime working years.
The expectation of a large inheritance
Getting a large inheritance from a loved one is a great blessing. However, you should never count on an inheritance to fund your retirement plans. There could be a lot of issues with the estate that could keep the money from getting into your hands.
For example, your loved one might have significantly more debt than you realized. The inheritance may be split in unexpected ways. Your loved one may not have effectively planned for the tax implications that you will need to deal with after their death.
There are a whole host of reasons that an inheritance may not be what you were planning. In employment terms, you should consider an inheritance as a bonus in retirement as opposed to basic income than you can depend on.
You should also keep in mind that people are living far longer today than they have in the past, so it is possible that you reach retirement age before the expected inheritance is available. Your loved one might also spend a good portion of your anticipated inheritance in their own retirement, too. That’s especially true if your loved one lives longer than expected.
Not knowing where to start
Digging your head in the sand when it comes to retirement is one of the worst mistakes you can make. Ignoring it or refusing to plan now will not help you down the road.
The need for retirement is likely in your future, whether you like it or not. The best thing you can do is recognize this need and start planning to address it. Making the effort and investments now offers a better return than ignoring the need completely.
In addition, assuming that you are “just fine” without having a professional work with you on your plan is also a big mistake. All of the online calculators in the world will not be able to give you a personalized assessment of your retirement planning based on your unique goals.
Planning alone often leads to ineffective planning, which you may not realize until you are well into your retirement years. Although the process can be intimidating, the potential of being unable to retire should be enough motivation to take action and seek professional support.
Dechtman Wealth Management can help you properly prepare for retirement, no matter what your financial situation looks like right now. We can help you get started, monitor and adjust, and put your plan into action when that time comes.
Our team will work alongside you and take the intimidation of retirement planning out of the picture. We offer a helping, trustworthy hand to help you through this process. Many retirement planning mistakes are unfortunately common, but they’re also easy to avoid with the right kind of preparation and support.
Retirement Mistake #2: Putting Off Saving for Retirement
Each person’s retirement plan is going to look different. It will vary based on their income, goals for retirement, and a lot more.
However, one thing is often the same across the board — the earlier you start, the better. A common mistake people make in retirement planning is especially basic: putting off the planning process.
Retirement planning can be a touchy subject, but delaying this important activity will not make it any easier. In fact, in most instances, waiting can make the entire process much more challenging.
Although we have put this item at number three in our list, it can sometimes be the most troublesome retirement mistake to avoid. A 2023 Bankrate survey found 74% of Americans have at least one financial regret. The most common issue cited was not saving for retirement early enough, at 21%.
For a survey including all types of financial regrets (i.e. not only those related to retirement), that’s an illuminating finding. It’s also a reminder to prioritize retirement savings and investing earlier rather than later.
How much you need for retirement is based on:
- Your expected expenses in retirement
- Goals and activities you plan to pursue in retirement
- Your personal preferences and tastes
- Your plans for giving or taking care of others
- Any existing medical needs
- The age that you plan to retire
You should also consider having a buffer on top of all of these considerations to account for unexpected expenses, such as medical emergencies and unanticipated housing issues. Planning for long-term care should also be part of your retirement plan.
The rule of thumb is that you should be able to replace 70% to 90% of your current income through savings/investments and Social Security payments. A good guideline on how much you need at retirement is to determine how much income you will need your portfolio to generate.
You should only plan to withdraw 4% of your portfolio’s value on a yearly basis, meaning you should have 25x whatever you believe your annual retirement expenses should be. However, if you plan to travel or you want to make charitable contributions or give financial gifts to family members, you will need to increase that number. The number may also need to be higher if you plan to retire early, too.
It is never too early to start saving—and it is never too late, either. You can catch up if you are behind. However, you need to take action right away to get yourself back on track. Once you turn 50, you can make “catch up” contributions to your retirement plans, and there are tax incentives to make these payments.
In 2024, for example, those below the age of 50 can contribute $23,000 to a 401(k) plan. Those over the age of 50 can make an additional $7,500 payment. Those under 50 can also make another $7,000 payment to their IRA. After 50, you can make an additional $1,000 “catch up” contribution as well.
Ideally, you will start saving in your 20s, which will give your investments more time to grow. Most people get their first full-time job around this age, so they can start putting away money to use toward their long-term goals.
However, someone in their 20s is often not thinking about something 40 years into the future, so do not fret if you did not start saving during this “ideal” time. Just be sure you are taking steps to start now.
Retirement Mistake #3: Borrowing from a 401(k) or Other Retirement Plan
When you borrow money from your retirement plan, you are essentially loaning money to yourself. While this may seem like a good idea, borrowing from your 401(k) is generally a bad idea unless you have a true financial emergency.
Under most repayment plans, you can face a significant penalty for leveraging your 401(k) before retirement. You will not only have to pay back the loan on a monthly basis, but you will also suspend any further contributions during that time as well.
Even if your plan does not automatically stop your investments, you may need to do so to maintain a balanced budget. In other words, you may have to reduce the amount of investment you were previously providing to keep up with the payments required to repay the loan.
The result is that you are short-changing your savings for months or even years. You end up missing out on all of the growth that you could have been gaining during that period. That’s a large part of what makes borrowing from your 401(k) such a serious mistake.
You also run the risk of having to pay back the loan on demand if you leave an employer. You might have between 30 to 90 days to pay back the 401(k) loan. For many people, that type of situation can be very stressful—and that is on top of losing your job.
If you do not pay the loan back within the allotted time frame, the 401(k) distribution becomes a taxable event. That means that you not only have to pay income tax on it, but you may have to pay penalties for taking out funds if you under 59.5.
Instead of borrowing from your retirement plan, you should build up an emergency fund that will cover three to six months of expenses. Your emergency fund will address most financial speed bumps, so you do not have to tap into your retirement funds.
In addition, you should save up to make larger purchases rather than get funds from your 401(k). Wait on the home renovations, car purchases, and other big-ticket items until you can pay for those costs in cash.
Retirement Mistake #4: Relocating on a Whim
It is fairly common to plan a move as part of your retirement. Making the transition to warmer climates or being closer to friends and family is very appealing, especially as you move toward retirement age.
However, relocating without planning ahead can trigger some unintended consequences.
If you have not spent any significant time in an area, you may come to realize that you actually do not care for it. You might be taken aback by the fact that you suddenly do not know anyone, or you may come to realize that the pace of life is far too slow (or fast) for your liking. Even endless rounds of golf or tennis can get old for some people.
If you want to make a move, do a few test-runs first. Spend some time in the area before you pack up your belongings and head to Florida or Costa Rica. Try an extended vacation before retirement, if possible.
This trial run is especially important if you are considering a move overseas. It can be difficult to adjust to climates, customs, and a completely different way of life in another country. Renting before you make a permanent move to any location might be a good idea as well.
From a financial perspective, you might end up having to deal with tax laws that you had not considered. For example, Florida does not have a state income tax, but most other states do. If you plan to continue some part-time work in retirement outside of your home state of Florida, you might need to make some adjustments to account for the state income taxes.
These small hiccups can cause big problems if you do not work with a financial advisor before you make a move. Financial and retirement planning are complex processes, with many potential opportunities and pitfalls to take into account. Working with a fiduciary financial advisor, a professional required to put your best interests first, can be crucial to understanding the risks of major life events like a move in retirement.
There can, of course, be some benefits to making a move, too. You could reduce your tax exposure or, with the right financial strategy, continue to own your previous home and earn rental income from it.
Planning out the move will help you take full advantage of the benefits. It will allow you to effectively weigh the pros and cons before investing time and money in the move.
Call our team today to set up an appointment—don’t wait to get started. Future you will thank you!
