8 Mistakes to Avoid in Retirement Planning

Thinking of retirement makes one feel a variety of emotions. For one, you feel the excitement building up. After all, you envision when you’ll finally break free from work and have all the time in the world to do everything you love. Also, there’s increased motivation. You want to work harder today as preparation for the future.

Then again, you might also dread the thought of retiring. You fear you might not tuck away enough resources to see you through once you officially bid the labor force goodbye. 

To temper retirement anxiety, get behind in responsible financial planning. Begin by consulting relevant stats and facts to know where the game is at. For instance, in a study by the American Advisors Group, 34% of respondents said 40 and below is the ideal age to start retirement planning.

As to where retirement funds come from, baby boomers vouched for social security while Gen Xers and millennials plan to maximize their 401(K). Other potential sources include pensions, investments, and personal savings.

Awareness of current trends will guide your retirement planning in the right direction. On top of that, be wary of the following common mistakes.

What Proper Retirement Planning Affords You

You might already be planning for retirement, but the question is, are you doing it right? If yes, you can expect to reap the following benefits. 

• Peace of mind
  If your retirement plans are in order, you’ll sleep more soundly today, knowing the future does not look precarious. As such, you can better focus on work and other responsibilities you have here and now. 

• Health
  It’s probably the biggest irony of life. When you finally have all the time in the world to pursue everything you’ve ever dreamed of, it comes at an age when your health slowly deteriorates. However, that shouldn’t always be the case. Correctly plan your retirement, and you’ll have access to top-notch healthcare to keep you living your best life post-work. 

• Comfort
  This factor is another priority for retirement planning. You want to live as comfortably as possible in a house suitable for all seasons and has everything you might need. Alternatively, you can spend your retirement years on a cruise ship, going to your dream destinations and traveling in style. 

• Luxury
  Speaking of style, consider it the peak of on-point retirement planning. While health and comfort are enough to make you feel satisfied as a retiree, you’d know you made all the right decisions if, on top of those, you can also afford to have the finest things as part of an elegant, luxurious lifestyle.

8 Retirement Planning Mistakes to Avoid

Many have retired before you, and their stories could serve as your reference point. Do not make these common mistakes, too.

1. Failure to cover all the bases

The rule of thumb for retirement planning is simple: get comprehensive. That means you need to account for all potential expenses down the line. Those may include basic needs such as food, utilities, and health care premiums. It’s also best to consider discretionary expenses, including travel and lifestyle.

Unless you plan to spend most of your retirement years quietly and privately at home, you need to have enough funds for worthwhile activities. You would want to be able to pay for gatherings where you host friends and family, as well as trips for when you get afflicted with #wanderlust. 

Solution: Use retirement budget planning tools to help you develop comprehensive retirement costing. After making your calculations, work with a financial advisor to ascertain how to hit your savings goals.

2. Reliance on home equity

In 2019, 2% of seniors lived in nursing homes. If you anticipate becoming a part of that demographic come retirement, then it’s safe to rely on your mortgaged real estate property to fund your later years. That applies, especially if you’ve built enough equity in the house.

After all, the decision to liquidate the asset would be easy if there’s a more pressing need for you to join an elderly community run by professionals.

However, this might not be the best idea if you want to get more out of life post-retirement. That’s most true if you factor market volatility into the equation, as it can easily cause your equity to dip in value.

Solution: Consider brokerage accounts and additional savings to cater to expenses relevant to an active lifestyle as a retiree. 

3. Miscalculation of retirement income taxes

Retirement income is taxable. If you have multiple accounts, expect them to have their corresponding tax duties every time you withdraw from them. Haphazard tapping of these accounts could lead to an accumulation of charges, including higher Medicare premiums, investment surtax, social security taxes, and capital gains taxes.

Before you know it, you’ve chipped off your retirement funds considerably. It pays to have a strategic withdrawal plan.

Solution: Work with a tax professional who could help you design a comprehensive tax plan that might legally circumvent applied taxes on retirement income. 

4. Miscalculation of retirement timeline

It’s never too early to plan for retirement. The sooner you do it, the better. However, it’s all too common for members of the workforce to miscalculate their retirement timeline.

Some begin to take retirement seriously only when they’re 5 to 10 years away from saying goodbye to their job. At this time, you have limited opportunities to adjust your financial situation. Also, you’re ill-equipped to respond to potential contingencies—case in point: a global pandemic that might require you to retire early. 

Solution: Get on top of your retirement planning today. Consult with a financial advisor so you can come up with an informed financial strategy. 

5. Reliance on Medicare

Health deterioration is a given when it comes to aging. As such, one of your retirement priorities ought to be healthcare. While the U.S. government’s Medicare will shoulder 80% of your medical bills, it won’t suffice.

Obviously, the remaining 20% should be a concern. And that 20% could mean a tremendous amount of money if you undergo a severe medical emergency that requires expensive procedures. According to statistics, the average person will accumulate out-of-pocket medical expenses amounting to $122,000 from age 70 onwards. 

Solution: Since paying out of pocket could easily compromise your retirement nest egg, sign up for extra coverage. Choose those that will take care of medical expenses Medicare doesn’t accommodate. 

6. Early tapping of social security

There’s a way to maximize social security benefits. That is by way of proper scheduling. One of the most common mistakes committed by retirees is tapping their social security funds as soon as they retire. Did you know the amount you get could increase significantly if you wait a few more years? For example, if you claim social security benefits at the age of 70, you get 32% more compared to when you start at 66. 

Solution: Know the state of your health. If you’re still sprightly, it might be a good idea to wait a little longer. 

7. Failure to Diversify

It pays to be mindful of your personal investments. Not only should they perform well, but, more importantly, they should be scattered across a variety of assets. The old adage that warns you about putting all of your eggs in one basket makes sense because no matter how financially literate you are, you can’t tell when market volatility will compromise your preferred basket. To mitigate that scary possibility, one word comes to mind: diversify. 

Solution: Do not rely solely on your 401 (K), for starters. Diversify your retirement funds with a Roth 401 (K). Income from the latter is not taxed unless you invest it. Meanwhile, funds from a 401 (K) have corresponding taxes as soon as withdrawn.

8. Getting Scared of Market Volatility

It’s understandable for seniors to stay conservative when it comes to investing. They’re putting their hard-earned money on the line, after all. And that’s money they need to sustain the rest of their life. However, there’s also no point in overreacting to market volatility, in such a way that limits your earning potential. Remember that a conservative financial portfolio is most susceptible to inflation. 

Solution: Use your free time to study investment options. With advice from a financial advisor, spot which high-risk but high-yield opportunities you might be willing to get behind. 

It is everyone’s dream to retire with health and wealth. After years of working hard, you deserve nothing less. To ensure that that’s what awaits you come retirement years, it pays to commence retirement planning as early as today. 

To adequately plan for your future as a retiree, research trends that would inform you of the best options available in terms of building a retirement fund. More importantly, be mindful of the best retirement planning practices. That entails knowing which mistakes to avoid, such as the ones mentioned above.

However, if you commit any of those mistakes, don’t lose hope. Remember that every problem has a corresponding solution. Just make sure you do the problem-solving before it’s too late.