10 Common Retirement Planning Mistakes You Need to Avoid

If you’re like most people, your retirement account took a big hit over the last couple of years. Now that the economy is in recovery, it’s time to begin rebuilding those IRAs and 401(k)s.

According to the 2013 Employee Benefit Research Institute’s Retirement Confidence Survey, 40 percent of all workers think they need to accumulate at least $500,000 by the time they retire to live comfortably.  However, more than half of those surveyed reported that they have less than $25,000 in total savings and investments, including 28 percent who have less than $1,000. According to Harris interactive, one-third of Americans don’t have a retirement fund at all.

To build your retirement savings, it’s important that you avoid the 10 most common retirement savings mistakes.

1. Not Factoring in Longevity Risk

Gregory Sarian, CPWA, CIMA, CFP, and managing director and partner of HighTower, notes that today’s retirees are living longer and longer.

“If a married couple is considering retiring in their mid-60s, there is a greater than 50 percent chance that one of them will live into their 90s,” Sarian said. “The two issues we see are not starting to save early enough and not saving enough to last well into their 90s. Young people especially should start saving as soon as they start earning a salary in a disciplined manner in a 401(k) or Roth IRA.”

2. Not Factoring Inflation and Taxes Into Retirement Funds

Sarian noted that a couple planning to spend $10,000 per month in today’s dollars during their 60s will need more than double that in their 80s. It’s important to create a plan to increase your level of spending to maintain your same standard of living.

3. Letting Your Fears Get in the Way

A recent Nationwide Financial survey conducted by Harris Interactive found that many Americans are more afraid of investing in the stock market than they are of losing their jobs, public speaking or even dying.

The survey also found 83 percent of respondents are afraid of another financial crisis, while 72 percent are concerned their personal health care costs will become unmanageable and 71 percent worry they will not be able to pay for their children’s educations.

4. Waiting to Maximize Your Contributions

“If you have access to an employer-sponsored retirement plan at work, you should be putting 10 to 15 percent of your pay into it at minimum,” said Scott Holsopple, managing director of retirement solutions at The Mutual Fund Store. “If that sounds too steep to handle right now, then at the very least contribute the full amount that your employer will match and increase your rate when and as often as you can.”

5. Ignoring Specific Financial Goals

If you haven’t set goals for yourself, then what are you saving toward? How will you know if you’re on track or not? Simply saving “for retirement” won’t cut it.

“Instead, think about what you want out of retirement so you can estimate how much it’s going to cost,” Holsopple said. Financial professionals recommend that people save up to 80 percent of their final working year’s salary for each year of retirement.

“Don’t forget to include basic needs like medical care,” Holsopple added. “Once you determine how much retirement income you’ll need, you can set specific savings goals designed to get you there.”

6. Going at it Alone

The Nationwide survey found that many Americans try to create a financial plan on their own. Rather than working with an investment professional, Generation X and millennials are more likely to use websites as their primary financial planning resource. A professional adviser can offer insights to help you reach your individual retirement goals.

7. Taking on Too Much Risk

When you’re younger and just starting to save for retirement, you can consider an aggressive approach because there is plenty of time to recoup any losses. And when you’re in your 40s and 50s, you can still afford to take some risks without too much concern. However, once you’re within 10 years of your planned retirement age, you should review your allocations and consider more conservative investments.

8. Being Too Conservative

On the other hand, not taking enough risk will hamper your opportunities to grow your investments.

“With interest rates at historic lows, those planning for a secure retirement can no longer count on bond yields generating income to meet their spending goals,” Sarian said. “If your retirement time horizon is greater than 10 years, you need to maintain appropriate allocation to generate returns consistent with your goals.”

9. Borrowing From Your 401(k)

Unless you’re facing bankruptcy or a foreclosure, it’s not a good idea to borrow from your retirement accounts. First, you decrease the amount of funds that can grow over the years in your 401(k). Additionally, should you leave your job or find a new one, you’ll have to repay the amount you borrowed within 30 to 60 days, or pay taxes on the amount — as well as a penalty if you’re under the age of 59 and a half.

10. Ignoring Your Investments

Too many 401(k) investors either randomly select their investments or let their money sit in the plan’s default option because they simply haven’t given it any thought.

“Look at your plan’s fund options and — based on things like your retirement goals, risk tolerance and length of time until retirement — select a portfolio that is appropriate for you,” Holsopple said. “Then periodically reassess the way your account is invested so that you can make adjustments as necessary.”

  • RetirementLiving

    The biggest mistake one can make is not to start retirement planning and saving/investing early in life, and to be consistent(save with every paycheck), take advantage of any employer matching plan, max out contributions when possible, eliminate debt, avoid risks with your nest egg and plan for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.).The site Retirement And Good Living provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

  • Dan

    My friends think I’m crazy for putting my earnings into a 401k. I’ll the one laughing when I’m shooting up futuristic brand name Alzheimer drugs and they can’t afford to even get screened.

  • 20something

    a lot of my fellow 20-somethings don’t save, even though some can, bc they just figure they can worry about it later. like if they get to 65 and don’t have enough money, oh well guess i’m working a little longer. lacking some serious foresight, how do you know exactly how your life is gonna go or if you’ll want to work at 65??

  • Mya P.

    Now THIS is some good advice!

    Because I am still 30 years away, I am focused on my savings, and I am determined not to be left uncomfortable in my golden years. I also am not moving to South Dakota just to survive. I want relaxing beach weather! Florida, Hawaii, or SoCal for me. Hopefully I take care of everything (savings-wise) so I don’t have to live way up in frigid Montana when I retire.

    After a thorough review earlier this year, these are the best tricks I found for putting away money, for my personal situation anyway.

    1. I now max out my match for my 401K by putting away the maximum amount (5% for me) that my employer will pay into the plan as a match. It is free money and I was dumb not to do it before.

    2. I found my biggest expense was driving. I cut that expense in half by buying a used Honda Civic ($13k), got a dirt cheap insurance policy from 4AutoInsuranceQuote ($25/month), and started using the Waze and GasBuddy apps to save on gas (cut my gas bill in half).

    3. I’m working on developing multiple revenue streams. Some ideas I have – Do contract work. Start a business on the side. Invest in a business as a silent partner. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Basically do whatever I can to generate income from multiple sources.

    4.I cut wayy back on eating out. I am having a year of putting away money hard, and food was a huge portion of my budget. I save about an extra $100 a week now easily, and eat healthier and better. Ditto if you spend a lot of money in bars.

    If I plan on having a full savings account and retirement I have to make good decisions.

    • Lou

      I pretty much had a similar plan, I had worked for company (34 years)that matched my contribution up to 5%, I maxed out the last 10 years, no pay raises. I also had a part time business for 19 years. I was able to retire @ 55 and now at 65 I have been able to live a life we choose. With SS I make more today than if I was still working making a 6 figure income.
      I never considered SS as a needed benefit, so we could really do without.
      Keep up the great work! Beware of those that tell you they can make $$$$ with your money, 99.9% never happen, be wise and research how to invest.