Retirement planning can be incredibly tricky for two reasons: First, many factors can affect your retirement planning, including your salary, how much debt you have, your expenses, the type of retirement account you’re using and more. Second, everyone’s individual retirement plan is different. There is no one-size-fits-all approach to realizing the visions of your golden years.
But generally, the right retirement plan is all about timing, opportunity and avoiding making major retirement mistakes. However, it’s so easy to make a mistake while planning for retirement that you’re bound to experience one or two.
With that in mind, here are 35 major retirement planning mistakes to avoid — and what to do if you end up making them.
1. Having No Retirement Plan
Not beginning the retirement-planning process is one of the first and biggest retirement mistakes you can make. Starting today, you need to figure out what you want your future to look like as well as how much money you can realistically set aside. Then, find a deposit product that will get you there.
Employers often offer 401k plans and pensions, though fewer companies are offering pension plans to employees. You can also open an IRA without an employer sponsoring the account. These products, which can offer greater returns and more diversification in investment than a traditional deposit account, are an effective way to start growing your retirement savings.
2. Not Knowing How Much You Need to Retire
Although it can be hard to predict exactly how much money you need to retire, you should at least have a ballpark range. If you’re nearing retirement, take a look at your current salary, add up your expenses — including an estimate of how much you’ll pay in medical costs in retirement — and meet with a financial planner or advisor to calculate an estimate of how much savings you should accumulate in order to retire and live comfortably.
If you’re decades away from retirement, meet with a financial planner and come up with a savings rate to figure out how much you should deduct from your paycheck each month to put in your retirement savings account.
3. Not Increasing the Amount You Save After a Pay Increase
A retirement savings rate is the amount of money you deduct from your paycheck to put toward your retirement. For example, if you deduct $200 every month from your $30,000 salary, your retirement savings rate is 8 percent.
Your savings rate will vary depending on your salary, but you should always aim to increase your savings rate as your salary increases. So, if your salary grows to $50,000, theoretically you should be saving more than $200 to get an 8 percent savings rate. In fact, you should be saving around $333 each month.
4. Not Taking Your Employer’s 401k Match
If your employer offers to match your 401k contributions to a certain percentage and you don’t opt in, you’re essentially leaving free money on the table. Make sure to contribute at least the amount your employer matches to your retirement accounts each month — the bonus is the incentive you’ll have to save more.
5. Having Incorrect Beneficiary Designations
In the event of your passing, you don’t want to leave a financial mess for your family by having your retirement plan beneficiaries and will in conflict. Make sure these designations match your intentions so dividing up your remaining assets will be as simple as possible for your family.
6. Paying High Retirement Account Fees
Pay attention to how much you’re paying in investment fees, including 401k fees. In 2014, the Center for American Progress estimated that a typical worker who starts saving at age 25, earns $30,502 and pays a 1 percent investment fee will end up spending nearly $140,000 in fees over his lifetime. In comparison, a high-income worker making $75,000 at 25 years old will pay more than $340,000 in investment fees.
The promise of high yields might be tantalizing, but compare these account fees to ones attached to lower-yield options to determine the true value of your investment.
7. Not Checking Your Retirement Account’s Performance
Resting on your laurels does not bode well for a strong retirement plan. Do you know how well your investments performed last year or over the last five years? Unless retirement is imminent, long-term performance should dictate which funds you invest in. Don’t let years pass you by on low-return investments if other safe options yield better rates.
8. Relying Only on Social Security Benefits
Social Security can provide some financial security — but you shouldn’t rely only on your Social Security checks to fund your retirement. Social Security benefits represent about 39 percent of elderly people’s income, states the Social Security Administration. With that in mind, you should start thinking not only about savings but also ways to boost your income in retirement to cover the other 61 percent or so.
9. Cashing Out Your 401ks Between Jobs
“The average cash-out amount for those changing jobs under age 40 is $14,300,” according to Fidelity Investments. Although cashing out your 401k might seem like a good idea if you need to solve a short-term financial crisis, doing so can have dire consequences.
For example, if you cash out or withdraw money for your 401k early — before age 59 1/2 — you can be hit with tax penalties, which leads to a larger tax bill. And not only will you have to pay any applicable federal and state income taxes, you could face a 10 percent early withdrawal penalty. To add insult to injury, Fidelity reports that your 401k plan administrator will typically withhold 20 percent of your balance to cover the takes you’ll likely need to pay on that withdrawal.
10. Believing You’ll Never Retire
You might love your career and not be able to imagine life without a 9-to-5 gig. However, your ability to keep pace in the workplace will likely wane eventually. Circumstances change, your health might not keep up with you, and you’ll likely be ready to eventually take it easy and retire. Don’t skimp on your saving because you think you can work until you’re 90 and earn more than you do today.
11. Assuming You’ll Want to Work During Retirement
You might not be saving that much for retirement because you think, “Well, I’m just going to get another job and work during retirement to supplement my income.” That’s a huge mistake.
Although you can work full time or part time during retirement, as many retirees do, you might find that working during retirement isn’t a realistic option. You might have a hard time finding a job that’s looking for older workers, your health might deteriorate and prevent you from working, or you might just change your mind because you want to fully enjoy your retirement.
Always err on the side of caution and build a hefty retirement nest egg in case you realize working during retirement is not an ideal option for you.
12. Assuming You’ll Never Work During Retirement
Just like you shouldn’t assume you’ll keep working during retirement, you also shouldn’t assume that you’ll never work during retirement. Many retirees find themselves taking up full-time or part-time jobs in retirement for various reasons — to supplement their retirement income, to stay active or even just to keep themselves busy.
If you can see yourself getting bored in retirement, or if you think you’ll have a hard time meeting your financial obligations, consider the possibility of taking on a job.
13. Not Using a Retirement Account That Offers Tax Benefits
Instead of using a traditional savings account to save for retirement, you should be using a retirement account that offers tax benefits, including any of the following:
- Traditional or Roth IRAs
- 401ks or Roth 401ks
These retirement accounts are meant to be incentives for saving and can help you save on taxes, so take advantage of them now.
14. Having Incorrect Transfer-on-Death and Payable-on-Death Designations
If you have a trust or estate plan, Fidelity recommends double-checking your transfer-on-death (TOD) and payable-on-death (POD) designations to ensure they match your will, as these designations will affect who gets your retirement account assets when you pass away.
“Some people might not realize that a TOD- or POD-titled asset overrides whatever is stated in a will,” reports Fidelity. So, it’s important that you properly coordinate your estate planning by reviewing your TOD and POD beneficiaries.
15. Cashing Out Your Pension
Your financial advisor might try to convince you to cash out your pension from a former employer. Unless you really need the money now, this is mostly in the interest of your advisor, who could make tens of thousands in the form of commission, according to Time Money.
You’ll want to seriously consider a one-time, lump-sum payment from your employer if you’re sick, your life expectancy is short, or you don’t have a surviving spouse that will need to rely on lifetime income, according to the Pension Rights Center. Or, you might consider a lump sum if you already have enough savings for retirement. But generally, try to avoid cashing out your pension.
16. Buying Too Much Company Stock
It’s unlikely that your employer is the next Enron — but you can’t rule out that possibility. Don’t put more than 10 percent of your investments in company stock.
17. Not Picking the Right Investments
Whether you’re investing in the stock market through a 401k or independently with the help of a financial advisor, make sure you’re making the right investments based on your risk profile. That way, your retirement portfolio can — hopefully — survive through stock market fluctuations and volatility.
Your retirement portfolio should include a healthy mix of stocks and bonds — such as short-term, long-term, large-cap, mid-cap, small-cap and international — and even cash investments. Review your investments, and allocate your assets as you see fit to diversify your retirement portfolio.
18. Burning Through Your Retirement Savings
If you saved a lot for retirement, it might feel like the ultimate payoff to finally stop working and gain access to your funds. However, don’t let all that cash fool you into living the high life early on in retirement.
Sure, the first years of retirement might be the best time to travel, do home projects and generally spend money on things you might no longer enjoy later on. But it’s important to spend your retirement savings moderately, as you have no idea how long you’ll need those funds to last you.
19. Having Incorrect Trusts
If your hope is to still have some money left over for your children or beneficiaries to inherit, then you’ll want to pay attention to your trusts. Every situation varies, but designating a trust as the beneficiary of a retirement account could be entirely useless if not drafted appropriately.
20. Retiring Too Early
Retiring early has two disadvantages. The first is obvious: The earlier you retire, the less time you have to save money for retirement. So before you retire, make sure you have enough savings to last you through your golden years. Or, have a plan in place that will guarantee you’ll have retirement income throughout your retirement years. This can include setting up a part-time job or finding other ways to make money in retirement.
The second disadvantage has to do with your Social Security payouts. Although you can retire as early as 62 years old and start receiving Social Security benefits, your age does dictate the size of your retirement payouts. So depending on your designated full retirement age, you could be receiving less benefits each year.
For example, if your full retirement age is 67 and you start your retirement benefits at age 62, prepare for your monthly benefit amount to be reduced by about 30 percent.
21. Investing Too Conservatively
The Great Recession might have scared you away from riskier investments. But if you’re decades from retirement, don’t be too conservative with your funds — especially if your options could give you high returns over a long period of time.
22. Investing Too Aggressively
Again, the theme here is moderation. You don’t want to miss out on the best returns you can get when investing, but you also don’t want to open yourself up to too much risk, especially in the years leading up to retirement.
23. Borrowing From Your 401k
Borrowing from your 401k isn’t always a terrible idea, especially if your other loan options come at a higher price. But in most cases, you’re going to want to avoid borrowing from your 401k or taking out a 401k loan. It will likely set you back far longer than the amount of time it took you to save those funds in the first place, thanks to compounding interest.
If you do plan on taking out a 401k loan, keep the following information from the IRS in mind:
- Generally, you’re allowed to borrow up to 50 percent of your vested account balance up to a maximum of $50,000.
- You’ll most likely have to pay back the loan five years, unless you use the 401k loan to buy a house.
24. Putting Your Money in Variable Annuities
Variable annuities can offer some benefits, according to the U.S. Securities and Exchange Commission. For example, these annuities make it possible for you to receive periodic payments throughout the rest of your life. They also have a death benefit, meaning that if you die before you started receiving payments, your beneficiary can receive a specified amount. And lastly, variable annuities are tax-deferred, which means you don’t have to pay taxes on income until you withdraw your money.
But in comparison to other mutual fund options, variable annuities can cost 50 to 100 percent more in fees and surrender charges, according to FinancialMentor.com. Furthermore, the gains on these accounts are taxed as normal income — not the lower capital gains — upon withdrawal.
25. Starting Your Retirement Planning Too Late
Time is of the essence when it comes to retirement planning. Start even a decade later, and you’ll have to dramatically adjust your monthly contributions to start making up for lost time. Take a look at the following scenario of a 40-year-old planning to retire at age 65 with a rate of return of 7 percent:
- Current principal: $20,000
- Monthly addition: $500
- Years to grow: 25
- Interest rate: 7%
- Total savings after 25 years: $488,042.88
Now, here’s how much a 50-year-old can expect to save by age 65 with the same parameters:
- Current principal: $20,000
- Monthly addition: $500
- Years to grow: 15
- Interest rate: 7%
- Total savings after 15 years: $205,954.76
A difference of 10 years means the 50-year-old can’t even save half as much as the 40-year-old. In order to save just as much as the 40-year-old in less time, the 50-year-old would need to save more than $1,400 each month.
26. Saving Too Much Too Early
If you’re in your 20s and you’re putting north of 10 percent of your income toward retirement, you might want to slow down. Sure, you’re setting yourself up for a comfortable retirement if you start saving aggressively at a young age, but you also don’t want to be behind on your savings for more imminent investments, like a home. Make sure you’re saving an appropriate amount to still reach other goals with minimal debt.
27. Avoiding Stocks
Franklin Templeton Investments’ 2013 survey found that 37 percent of long-term investors think they can avoid stocks altogether, reports ThinkAdvisor. However, you likely won’t see your retirement savings grow to where you’d like them to be by relying on only bonds, certificates of deposit and traditional deposit accounts — especially at today’s low rates.
In order for your retirement portfolio to be truly diversified, you’ll likely want to include some stocks. Speak with a financial advisor to find out just how much stock your portfolio can handle.
28. Not Planning for Medical Expenses
The mind often outlives the body, and healthcare in retirement doesn’t come cheap. Fidelity Investments estimates that a couple retiring in 2015 should expect to spend approximately $245,000 on healthcare expenses throughout retirement. This number is $25,000 more than the predicted healthcare costs from 2014.
With healthcare expenses increasing every year, it’s important to factor in medical expenses when budgeting for retirement. Opening a health savings account can help ensure you are socking away a designated amount of money toward these retirement costs.
29. Not Calculating How Long Your Retirement Will Be
It’s impossible to know how long you’ll live, but it’s always better to err on the side of overplanning. The alternative is you’ll outlive your retirement funds.
30. Having Unrealistic Expectations for Retirement
Consider the true costs of planning for retirement and be honest:
- What kind of lifestyle do you want?
- Do you want to travel?
- Do you want to start a business?
- Are you planning on helping your children or grandchildren with their expenses?
Draft a retirement budget that’s realistic and face the present reality of what you’ll have to sacrifice to get there.
31. Paying Off Debt Before Saving for Retirement
When faced with the prospect of saving for the future or paying down debt, many people struggle with deciding which takes precedence: contributing to a retirement savings plan or paying off credit card, mortgage or other debts?
Because time is so crucial when planning for retirement — even if it’s a few decade away — it’s best to devise a strategy that allows you to pay down debt while still making some headway, however minor, toward retirement.
32. Prioritizing Your Child’s Education Over Retirement
It’s no doubt generous to save for a child’s education; however, you should consider the costs and benefits that affect you versus your child saddling that burden, especially if you’re behind on your retirement savings.
With many options available that your child can take advantage of to pay for part or all of college — such as student loans, scholarships, grants, and work-study jobs — saving for their college tuition should not be your priority; saving for retirement should. Ultimately, if you’re short on retirement savings, you’ll likely have fewer chances than your child will to cover expenses. If that’s the case, don’t risk your retirement to put your children through college.
33. Carrying Debt Into Retirement
For many people, retirement means transitioning to a fixed-income lifestyle. Carrying debt into retirement will be detrimental to your financial strength and eat away at your retirement savings. Do your best to get all debt paid off before you stop working.
34. Forgetting About Inflation During Retirement
When planning for retirement, you’ll also want to keep inflation in mind. Inflation can decrease your money’s purchasing power over time, which means your retirement income is at risk. Because inflation increases the costs of goods and services, it’s possible your purchasing power will suffer — even if the inflation rate is low.
Fidelity found that something that costs $50,000 today — such as a car — can cost as much as $82,030 in 25 years at a 2 percent inflation rate. If the inflation rate is 4 percent, that cost is an outstanding $133,292.
To battle inflation, Fidelity recommends choosing investments that can keep up with inflation — stock mutual funds, real estate securities and more — which could be a wise investment decision.
35. Giving Up Hope Because You Started Late
As the saying goes, “better late than never” — and this absolutely holds true when planning for retirement. Even if you started your retirement savings late by five, 10, 15 or even 20 years, it’s still worth it to start saving for retirement now.
To catch up on your retirement savings, take advantage of your retirement account’s catch-up contributions policy, downsize to a smaller home and find unconventional ways to make more money.
And remember, you’re not the only one who’s behind on retirement savings. A 2016 GOBankingRates.com survey found that one in three Americans has $0 saved for retirement. Hopefully, that gives you the motivation to start planning for retirement today.
Sydney Champion contributed to the reporting for this article.