A lot of people worry that they won’t have enough money in retirement. Recently released data shows that 55.6 percent of Americans say they are not on track to retire comfortably, and an shocking 67 percent of Baby Boomers have no retirement savings at all. Yikes!.
I’ve spent years helping people figure out how to plan for retirement, and I keep seeing the same mistakes. Let’s look at the three biggest mistakes that could ruin your plans for retirement, and more importantly, how to avoid them.
Pitfall #1: Not Having Clearly Defined Goals (or Starting Too Late)
When I meet with new clients, the first question I usually ask is “What does retirement look like for you?” The blank stares I get tell me everything. Without clear retirement goals, you’re essentially driving cross-country without a map!
Why This Matters
Having defined retirement goals is crucial for several reasons:
- Provides Direction: Goals give you a clear purpose for your retirement planning efforts. They help you prioritize savings and investments that align with your desired lifestyle.
- Measures Progress: Specific goals serve as benchmarks to track your success. You can monitor progress and make adjustments to stay on track.
- Motivates Action: Knowing exactly what you’re working toward inspires you to take action and stay committed to your retirement planning journey.
- Reduces Uncertainty: Clear goals reduce anxiety about retirement. Knowing what you need to achieve gives you peace of mind.
The Power of Starting Early
The second part of this trap is waiting too long to start saving. To show why this is so terrible, let me give you a quick example:
Meet Sarah and John. Both want to save $1 million for retirement.
- Sarah starts at age 25, contributing $500 monthly
- John waits until 35, contributing $1,000 monthly (twice as much!)
Assuming a 7% annual return, by age 65:
- Sarah accumulates $1 million
- John only accumulates $732,000
That’s the magic of compound interest! Even though John saved TWICE as much each month, he couldn’t catch up because Sarah had a 10-year head start.
How to Fix It:
- Set SMART retirement goals (Specific, Measurable, Achievable, Relevant, Time-bound)
- Start saving NOW, no matter how small the amount
- Use retirement calculators to estimate your needs
- Review and adjust your goals annually
Pitfall #2: Hiring the Wrong Financial Advisor (or None at All)
This might be the most critical mistake I see. A lot of people put their financial future in the hands of the wrong kind of advisor or try to plan their retirement on their own.
The Problem with Many Financial Advisors
Early in my career, I noticed something wasn’t quite right with how many financial services companies operated. Many firms were “one and done,” focusing on closing a deal and getting a commission rather than building long-term relationships.
Most advisors in the industry are “broker-dealers” who earn commissions or fees based on the financial products they sell, like mutual funds or insurance-based products. This creates significant conflicts of interest! They aren’t required to disclose their financial interests in the products they recommend.
What to Look For Instead
You want a fee-only fiduciary advisor – someone legally obligated to act in your best interest 100% of the time. Certified Financial Planners (CFPs) have this fiduciary duty. This model is rare, representing only about 5% of the industry.
How to Fix It:
- Look for fee-only advisors who are fiduciaries
- Verify their credentials (like CFP certification)
- Ask direct questions about how they’re compensated
- Check for conflicts of interest
- Look for someone who provides comprehensive planning, not just investment advice
Pitfall #3: Failing to Plan for the Unpredictable
The third major pitfall is failing to account for the unpredictable nature of retirement itself. This includes:
1. Selling Assets During Market Downturns
If your first few years of retirement coincide with a stock market decline, you might need to sell more assets to meet your income needs. This leaves fewer shares in your portfolio and limits its ability to recover during a future market rally.
Check out this eye-opening example from the Schwab Center for Financial Research:
Two retirees with identical $1 million portfolios both withdrew $50,000 annually (increased by 2% for inflation):
- Investor 1 faced a market downturn in the first two years of retirement (-15% returns), followed by 6% returns thereafter. Their account was depleted after just 17 years.
- Investor 2 enjoyed 6% returns for the first eight years, then faced a downturn in years 9-10, followed by 6% returns. After 20 years, they still had over $100,000 left!
The timing of market downturns makes a HUGE difference!
2. Collecting Social Security Too Early
Many Americans choose to collect Social Security as soon as they’re eligible at age 62. But taking benefits before full retirement age means settling for smaller payments for the rest of your life.
Here’s the difference it can make:
- Age 62: $1,706 monthly
- Age 67 (Full Retirement Age): $2,437 monthly (43% more!)
- Age 70: $3,022 monthly (77% more than age 62!)
Waiting to claim Social Security can also help extend the life of your portfolio. While you’ll need to rely on savings for several years, the increased guaranteed income later can help preserve your portfolio in the long run.
3. Not Planning for Inflation and Healthcare Costs
Life expectancy has increased significantly – between 1950 and 2025, U.S. life expectancy rose by a decade! This means your money needs to last longer than previous generations’, and inflation will eat away at your purchasing power.
I’ve seen Silicon Valley clients aiming for early retirement who don’t realize their current $175,000 annual lifestyle could easily require $350,000 in just fifteen years due to inflation.
Then there’s the healthcare gap. If you retire before 65, you’ll need expensive private insurance until Medicare kicks in. Even after that, Medicare doesn’t cover everything, and long-term care costs can be astronomical.
4. Creating an Inefficient Distribution Strategy
When it’s time to turn your savings into income, it’s not as simple as selling investments. You need to consider timing, life expectancy, and taxes.
Once you reach age 73 (75 for those born in 1960 or later), the IRS requires you to take Required Minimum Distributions (RMDs) from tax-deferred accounts. If these RMDs push you into a higher tax bracket, you could pay more on regular income and owe taxes on Social Security benefits too.
How to Fix These Planning Problems:
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Adjust your asset allocation: Keep a portion of your retirement portfolio in cash or cash alternatives, plus some in less volatile investments like high-quality short-term bonds.
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Stay flexible with spending: Be prepared to reduce expenses or delay large purchases during market downturns.
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Consider delaying Social Security: If you’re in good health and can afford to wait, the increased benefits can provide valuable guaranteed income.
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Plan for inflation: Factor in 2-3% annual inflation when calculating future expenses.
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Account for healthcare costs: Budget for Medicare premiums, supplemental insurance, and potential long-term care needs.
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Create a tax-efficient distribution strategy: Consider taking withdrawals from tax-deferred accounts before RMD age to reduce future RMDs. You might also consider Roth conversions, which offer tax-free withdrawals and aren’t subject to RMDs.
Making Your Retirement Dreams a Reality
The good news? Even if you’ve made some of these mistakes, it’s not too late to correct course. Here’s your action plan:
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Get clear about your retirement goals – What lifestyle do you want? Where will you live? What activities will you pursue?
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Start saving more NOW – Increase your contributions to retirement accounts, even if it means cutting back in other areas.
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Find the right financial partner – Someone with expertise, a fiduciary duty, and a commitment to understanding your personal dreams.
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Create a comprehensive plan – This should include investment strategy, tax planning, healthcare considerations, and a flexible withdrawal strategy.
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Review and adjust regularly – Life changes, markets fluctuate, and tax laws evolve. Your plan should adapt accordingly.
I believe everyone deserves a comfortable retirement where money is a tool that helps you live your best life, not a constant source of stress. By avoiding these three major pitfalls, you’ll be well on your way to making your retirement dreams a reality.
What retirement planning mistakes have you made or avoided? I’d love to hear your experiences in the comments below!
FAQ: Common Retirement Planning Questions
What is the number 1 retirement mistake?
According to recent data, underestimating the impact of inflation is the most common mistake, with 49% of retirees reporting this error.
What is the 3% rule in retirement?
The 3% rule says you can withdraw 3% of your retirement savings annually and avoid running out of money. This is more conservative than the traditional 4% rule and accounts for inflation, lower portfolio yields, and longer lifespans.
When should I start collecting Social Security?
This depends on your personal situation, but delaying benefits until at least full retirement age (66-67) provides significantly higher monthly payments. If you can wait until 70, you’ll maximize your benefit.
How much do I need to save for retirement?
While there’s no one-size-fits-all answer, most financial experts recommend saving 10-15% of your income throughout your working years. Use retirement calculators to estimate your specific needs based on your desired lifestyle and expected longevity.
Remember, retirement planning isn’t just about numbers—it’s about creating the life you want to live in your golden years. By avoiding these common pitfalls, you’re setting yourself up for a retirement filled with possibilities rather than limitations!
Retirement Mistake #3: Buying too much of your company’s stock
If your employers stock shares are an investment choice in your 401(k), you may want to consider keeping your allocation to no more than 10 percent. With your salary already tied to your company’s fortunes, you don’t want a sizable part of your retirement savings to be similarly dependent.
Retirement Mistake #2: Getting out of the market after a downturn
When the market takes a big hit, you may be tempted to pull out all the stocks in your retirement portfolio. If you do, you may miss the gains if the market turns around. You want to keep a good mix of asset classes in your portfolio: stocks, bonds, and cash. And once a year, you should rebalance to keep your asset allocation on track.