Biggest Mistakes People Make Getting Ready for Retirement

It’s always good to learn from your mistakes. But, it might be even better to learn from other peoples’ mistakes.

With that in mind, let’s talk about some of the big mistakes people make when it comes to preparing for retirement. (We’re going to skip over some of the more obvious ones, like not saving enough for retirement.)

Most of the biggest mistake go back to proper planning and preparation. The more you plan for retirement, the more you increase your odds for success. And, as you will see from the financial professionals below, planning tops most of their lists.

Hopefully, you’ve already addressed these in your plan for retirement. And if you have, hopefully you still have time to address them.

1. “Not having a written, defined income plan that includes guaranteed income other than Social Security,” says Brian Singer at Singer Financial Group in Brownsburg, Ind. By incorporating annuities, you can guarantee* a portion of your retirement income. Singer says along with that is the importance of tax planning. “Most people save money in 401(k)s and IRAs that are funded with pre-tax dollars,” says Singer. Many people forget that the funds in those retirement accounts are not taxed when they go in. The money is taxed as ordinary income when it is withdrawn.

2. Failure to have an investment plan. “Having investments is different than having an investment plan,” says Philadelphia financial planner Kyle Rolek. “Having investments means the person has saved, they’ve done some investing, and now they have a collection of accounts. But they aren’t really sure how those accounts will be used in retirement. An investment plan identifies how each account will be used in retirement, and then invests appropriately for each specific use.

“For example,” Rolek says, “if the purpose for the account is to cover short-term expenses, the account should be in something very safe and liquid like a bank account. If the purpose is long-term growth to battle inflation, it should be invested in something more growth-oriented like a diversified portfolio of stocks and funds. When people view their investments sort of just lumped all together into one pot without any rhyme or reason, not only can that lead to bad financial outcomes, but it’s also disorganized and causes more worries.

“Having an investment plan for retirement can lead to much better financial outcomes, and it also feels better along the way too,” Rolek says.

3. Underestimating market volatility, especially the damage that volatility can do to your 401(k), says Singer. People should be especially wary if they are deriving income from that volatility, he says. Just look back to 2008. Among those who suffered most were retirees who were no longer contributing to their retirement accounts and heavily invested in stocks. They did not have time to recover from the damage and basically locked those huge losses in their portfolio.

4. Being too conservative or too aggressive with their portfolio. Singer says people headed towards retirement need more than ever to be diversified. “The best way is to get some professional help,” he says.

5. Not knowing the difference between average returns and the sequence of those returns. Singer says the problem with estimated income using average returns is that it assumes the return will be the same every year. It won’t be. The fact is the returns on your investment will vary – and there is a possibility of lower returns in the early years of retirement.

“When taking income early in retirement, take from the account that has the least amount of volatility,” says Kirk Cassidy, president Senior Planning Associates and Strategic Investment Advisors in Farmington Hills, Mich. “If you take more from the account with more volatility, you run the risk of running out of money.”

6. Not planning for health insurance. There are two issues here, and we’ll deal with them separately.

First, let’s deal with people who retire early. Say you retire from your corporate job at 62. People tend to forget that once they don’t work for a corporation (which which may have been paying a percentage of the premium), and if they aren’t covered by their spouse’s plan, they will need to go to the open market and buy health insurance until they can qualify for Medicare, which doesn’t kick in until 65.

Secondly, people forget to budget for health care costs. Fidelity Investments estimates that a couple retiring at 65 years old will have to pay health care costs of $275,000 during retirement. If those costs aren’t accounted for in your retirement savings, you might be forced to draw down your nest egg to pay for health care for you or your spouse.

“Financial independence is not owned. It is only rented,” says Singer. “Rent is a do-over every day. You can’t get complacent.”

This article is for informational purposes only and is not intended to offer specific financial, tax, or legal advice. Prior to making any decisions, we encourage you to speak with a qualified financial professional, tax professional, and/or legal professional regarding your unique needs.