7 Mistakes of Retirement Planning
Avoid these to boost your prospects for financial security
(Editor’s note: This content is sponsored by Acts Retirement-Life Communities.)
Retirement planning can be an exciting time, as you can see the life you’ve worked so hard to create begin to come into existence. It can also be fraught with anxiety about unforeseen pitfalls or insufficient preparations.
Since the consequences for even the smallest mistake could end up feeling dire when it comes to how you can spend and access your retirement income, we want to alleviate your anxiety as much as possible. To better foresee hard-to-spot problems and better understand how to avoid or adapt to problems that do arise, here are seven of the most common mistakes people make while planning their retirement.
1. Not Thinking Ahead When It Comes to Inflation
For most of us, the amount of money we earn during our time in the workforce kept ahead of the rate of inflation, because inflation doesn’t typically outpace wages.
But when you retire, this changes. Your income (other than from Social Security) often becomes fixed. Suddenly, this means that inflation can all too easily become an issue, especially if your budget took into account costs at the time of planning, not 10 or more years after retirement. Make sure you consider rising costs when calculating for how far you can stretch that retirement income — a hundred dollars might have a certain amount of buying power today, but it’s a certainty that it won’t have as much buying power a decade or even five years from now.
2. Not Estimating Your Needs Accurately
Many retirees end up lowballing their financial needs over time, and that can be disastrous. If you’re looking forward to maintaining your standard of living once you punch that time clock for the last time, you’re going to need to find a replacement for anywhere between 80% and 90% of your pre-retirement income in order to live comfortably.
If you don’t have plans in place to replace that, you may run into financial problems somewhere down the line when you start living beyond your means. This might require you to completely upend your living arrangements and spending habits, which is something you might not have anticipated. While retirement income is there to be spent and enjoyed, don’t forget that you still have to keep the lights on and the fridge stocked!
3. Retiring Too Early
With the pandemic, maybe you’ve found you need to retire later than planned for financial reasons, or perhaps you are finding yourself retiring earlier than planned because you lost your job or have been furloughed. What is important to consider if you do decide to retire early, is that you risk jumping the gun if you haven’t gotten your retirement income sorted completely. You may feel like you can supplement this by picking up some part-time work somewhere, but this is a situational (and temporary) solution that may not be ideal, especially if you find your earning power eroded because of changes in the workforce or in your own capabilities.
Better to make sure you’ve got all your eggs in one retirement basket and that all your savings income sources are well-organized before stepping back from the workforce on a permanent basis. Meanwhile, if you or your partner don’t have a choice about early retirement (due to disability for example), this makes planning ahead as far as possible even more important.
4. Not Setting Up Contingencies for a Partner
Speaking of partners, if you have one, you need to ensure that you (or your significant other) will be able to continue living comfortably if one of you outlives the other. Social Security benefits, which are the primary source of income for many retirees, decrease at the death of a spouse, so make sure you’ve got stopgap measures in place in terms of retirement income above and beyond Social Security to prevent the drop in income from having a negative effect.
It’s not something you might want to spend much time thinking about, especially if you’ve been together for decades, but it’s not something you can neglect — for your sake as well as for your partner's!
5. Not Understanding How Your Tax Rate Affects Your Retirement Income
Retirement tax rates might not be as low as you anticipate, and this means you’d better check and re-check them to be sure you know what you’re getting into and what you’ll be responsible for. You don’t want to budget for one tax rate only to find out that you’ll be paying a higher rate in retirement, as this will throw off all your calculations — and since new legislation can change tax rates at the drop of a hat, this can affect any retiree at any time.
Additionally, you need to make sure that any withdrawals you make from retirement savings plans are done from the proper accounts — taxable, tax-deferred, and non-taxable accounts all influence your tax rate in different ways.
6. Not Having a Sufficiently Diversified Investment Portfolio
Investing for the future is of the utmost importance when it comes to retirement income. It’s often appealing to rely on low-risk, long-term investments to ensure you’ll have the income available to rely on in retirement, but not diversifying your investment portfolio (and occasionally taking measured and informed investment risks) isn’t doing you any favors.
As your investment horizon shortens, diversification becomes even more important — this is good news, since you’ve got plenty of time to diversify and take a few risks if you still have some time before you reach your target retirement age.
7. Underestimating the Cost of Health Care
Even the healthiest and most in-shape retirees will need medical care from time to time. Health care costs in the United States are notoriously high, even for those on Medicare, and there are no clear indications that this trend won’t continue well past the immediate future.
It’s therefore important to explore all your public and private health insurance and payment options well before it’s time to retire, as you don’t want injury and illness turning your dream-come-true retirement into a living nightmare because you didn’t budget properly for rising health care costs. Consult all your options well before you need them.
And that includes more than just insurance and Medicare choices. Consider visiting prospective retirement communities and ask about their health options. If health care is a primary concern, or if you just want to make sure you are covered for the future, consider a Continuing Care Retirement Community, which after an initial entrance fee includes coverage for medical needs as they arise.
Start Planning Today
Retirement planning is the first step into the next chapter of your life – and you want to make the right decisions. Take your time, don’t feel pressured. Gather as much information as possible, and if you’re considering moving to a retirement community, you should visit to see if it’s right for you.
For more information on retirement, read these articles by Acts Retirement-Life Communities:
- Can I Afford Retirement?
- Retirement Myths vs Reality: What You Need to Know
- Should I Sell My House When I Retire?
Acts Retirement-Life Communities is the largest not-for-profit owner, operator and developer of continuing care retirement communities in the United States. Headquartered in suburban Philadelphia, Acts has a family of 23 retirement communities that serve approximately 8,500 residents and employ 6,200 in Pennsylvania, Delaware, Maryland, North and South Carolina, Georgia, Alabama and Florida. For more information about Acts visit actsretirement.org.