Learn About Retirement Planning Mistakes to Avoid

Common Retirement Savings Mistakes That Cost You Money

Many people make mistakes early in their working years that have serious effects on their retirement savings. One major mistake is waiting too long to start saving. A 25-year-old who saves $200 per month for 40 years will have roughly $300,000 more than a 35-year-old who saves the same amount for 30 years, assuming an average 7% annual return. The difference comes from compound interest—your money earns returns, and then those returns earn their own returns over time.

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Another common error is not contributing enough to employer retirement plans, especially if an employer offers matching contributions. When an employer matches your contribution (for example, matching 50 cents for every dollar you contribute up to 6% of your salary), that is immediate money added to your account. Not taking full advantage of this match is like turning down a raise. A worker earning $50,000 who contributes 3% when their employer matches up to 6% leaves about $1,500 per year on the table.

People also frequently make the mistake of cashing out retirement accounts when they change jobs. If you withdraw money from a 401(k) before age 59½, you typically pay income tax on the withdrawal plus a 10% penalty. A $20,000 early withdrawal could cost you $4,000 to $6,000 or more in taxes and penalties, depending on your tax bracket. Rolling the money into an IRA or your new employer's plan preserves these funds for retirement.

Many workers also fail to rebalance their portfolios as they age. A common strategy is to hold a higher percentage of stocks when you are young (since you have time to recover from market downturns) and shift toward bonds and more stable investments as you near retirement. Someone who never adjusts their allocation might end up taking too much risk close to retirement or being too conservative when younger, missing out on growth potential.

• Start saving as early as possible, even with small amounts
• Contribute enough to capture any employer matching funds
• Avoid withdrawing retirement money early when changing jobs
• Review and adjust your investment mix every few years

Underestimating How Much Money You Will Need

A significant planning mistake is not calculating how much money will actually be needed during retirement. Many people use general rules like "you will need 70% of your pre-retirement income" without doing the math for their specific situation. This rule may not fit everyone. Someone who paid off their mortgage and has minimal expenses might need less than 70%, while someone with health issues or active hobbies might need more.

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The length of retirement is also often underestimated. A 65-year-old man has about a 50% chance of living past age 85, and a 65-year-old woman has about a 50% chance of living past age 88, according to Social Security Administration data. A retirement plan that only accounts for 20 years of spending could fall short if you live to 90 or beyond. Planning for a 30-year retirement is more realistic for many people.

Healthcare costs are a major expense that people frequently overlook. The average retiree aged 65 will spend roughly $315,000 on healthcare during retirement (including premiums, copays, and out-of-pocket costs), according to research from Fidelity. This does not include long-term care costs like nursing homes or in-home care, which can run $100,000 or more per year. Many people do not set aside enough to cover these expenses.

Inflation is another factor that people underestimate. Money loses purchasing power over time. Something that costs $100 today might cost $150 in 20 years at a 2% inflation rate. If you estimate you need $50,000 per year to live on at age 65, you might need $65,000 or more per year at age 85 just to maintain the same standard of living. A retirement plan must account for this gradual increase in living costs.

• Calculate your specific retirement expenses, not just use general percentages
• Plan for a 30-year retirement or longer
• Set aside funds specifically for healthcare and long-term care costs
• Factor inflation into your income projections

Taking on Too Much Investment Risk or Not Enough

Finding the right balance of investment risk is tricky, and many people get it wrong in both directions. Some people are overly cautious and keep most of their retirement money in savings accounts or bonds, earning very low returns. A 40-year-old with $200,000 in a retirement account earning 1% per year will have roughly $243,000 at age 65 (in today's dollars, adjusted for inflation). The same person earning 5% per year would have roughly $430,000. The difference—about $187,000—comes from taking a moderate amount of risk with stock investments.

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On the other hand, some people take too much risk, especially later in their working years when they cannot afford significant losses. A 60-year-old with all their money in individual stocks might see their portfolio drop 30% or 40% in a bad market year, and they may not have enough time left to recover before they need to start withdrawing money. This can force them to take money out at the worst possible time, locking in losses.

A common mistake is not diversifying investments. Some people concentrate their retirement savings in their employer's stock or in one sector like technology. If that company or industry struggles, a large portion of their retirement funds can disappear. Studies show that diversified portfolios (holding a mix of U.S. stocks, international stocks, bonds, and other investments) tend to perform better over long periods while experiencing smaller ups and downs.

Many people also make emotional investing decisions that hurt their results. Panic selling during market downturns locks in losses right before a recovery. Chasing high-performing investments right before they decline is another emotional mistake. Research shows that the average investor underperforms the market by 2-3 percentage points per year due to poor timing and emotional decisions. A disciplined approach of investing regularly and rebalancing periodically produces better long-term results.

• Match your risk level to your age and timeline
• Young workers can generally handle more stock exposure; older workers should shift toward more stable investments
• Diversify across different types of investments rather than concentrating in one area
• Stick to a plan rather than making emotional decisions based on market conditions

Ignoring Social Security and Claiming at the Wrong Time

Social Security is a major source of income for most retirees, yet many people do not think carefully about when to claim it. You can start receiving Social Security benefits at age 62, but your monthly payment will be about 30% lower than if you wait until your "full retirement age" (which is between 66 and 67 for people born in the 1950s). If you wait until age 70, your monthly benefit will be about 24-32% higher than your full retirement age benefit. For someone with a full retirement age benefit of $1,500 per month, the difference between claiming at 62 versus 70 could be about $600 per month—or $7,200 per year.

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The right time to claim depends on your individual circumstances. If you have a family history of longevity, good health, and do not need the money immediately, waiting until 70 will result in higher lifetime benefits. If you have health issues, lower life expectancy, or need the income sooner, claiming at 62 might make sense. If you are married, the decision becomes even more complex, as there are strategies involving spousal benefits and survivor benefits that can increase your total family income.

Many people also make the mistake of not coordinating Social Security with their other retirement income and investment withdrawals. If you are drawing from an IRA at the same time you start Social Security, and if your combined income exceeds certain thresholds, up to 85% of your Social Security benefits become taxable. A financial situation review can sometimes show that delaying Social Security while drawing from other accounts results in lower taxes overall. People earning above certain income levels also face higher Medicare premiums that are tied to their income, another reason to think about the timing of retirement income.

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