10 Costliest Mistakes for Planning Retirement Financials

Pritam Nagrale

Updated on:

retirement planning mistakes

Anyone that looks forward to a happy, enjoyable retirement, especially upon attaining the age of 60 years. Thoughts of retirement conjure up visions of leisurely time spent reading, watching movies, by the seaside and socializing with other retirees.

Great. But unless your retirement is carefully planned well in advance, these golden years can become nightmarish.

Retirement means loss of the active source of income from work or business. It does not imply you do not need money, anyway. Indeed, cash is important for everyone until we run out of breath.

Hence, a happy and enjoyable retirement depends upon your financial status and freedom.

Unfortunately, lots of Americans, as well as people around the world, commit blunders in planning retirement financials. With some care, you can avoid these costly mistakes.

Here we look at these 10 costly mistakes and how they can cost your much awaited happy retirement.

retirement planning mistakes

10 Costliest Mistakes in Retirement Financials

Regardless of income, you would definitely have stashed away money for retirement. Is this money working for your retirement? Here are some things to consider.

1. Not Saving for Retirement

Here’s a real shocker: Survey conducted in 2024 by Northwestern Mutual reveals, one of every three Americans has less than $5,000 in retirement savings. This reputed Assets Management Company surveyed 2003 respondents across the US in May 2018.

Their findings are indeed shocking.

  • About 33 percent of Americans closest to retirement have zero to $25,000 as retirement savings.
  • Nearly 75 percent Americans have little confidence that Social Security would be available when they retire. Of these 24 percent do not believe Social Security would be available at all while 51 percent think it is “somewhat likely” to get money from Social Security.
  • Over 46 percent Americans have taken no steps for their financial security if they live longer and run out of savings.
  • Concerns over not having enough to retire are driving 38 percent Americans to expect working till they are 70 or older.
  • Among 55 percent of Americans that believe they will have to work past 65, most people- around 73 percent said, they would not have enough money to retire comfortably.

And you can take this results of the study very seriously. This company manages more than $125 billion of client assets through its wealth management and investment services.

Northwestern Mutual ranks 97 on the 2017 Fortune 500 and is recognized as one of the “World's Most Admired” life insurance companies in 2024.

If these shockers have shaken you from complacency over retirement, there is nothing to worry. The American government says, people usually live an average 20 years after retirement.

Hence, the US government provides excellent resources to help you plan savings and avoid costly mistakes in retirement financial planning.

2. Under-investing in Health Insurance

Retirement and advancing age tend to bring in unexpected medical expenses. An average American couple will need $280,000 for medical expenses after retirement, excluding long term healthcare, a 2016 study conducted by Fidelity Investments found.

The alarming part of these medical expenses being, they would have to be borne out-of-pocket unless you are adequately covered by one or more healthcare plans.

Healthcare is the largest expense after housing, transportation, food and other essentials. The reason: advances in medical science has increased overall longevity.

This means Americans are now living longer after retirement. The second factor is overall medical inflation in the USA that is growing at a rapid pace. Unless you are well provided to meet these medical expenses, retirement can become a nightmare overnight.

While you may have a healthcare plan in place, it is better to opt for one more that would increase your medical expenses post-retirement.

Should you be employed now, find whether the employer offers Health Savings Account (HSA) and if you are eligible to contribute towards one.

HSA plans have several distinct benefits: your contributions to HSA are exempt from income tax payable on total income. The employer also contributes some money towards your HSA, meaning more money gets collected.

You can utilize the money to grow this money and withdrawals are tax-free, if needed for medical expenses both while working or upon retirement.

If you are already 65 or more, it is high time to review your health plans. Consider various options available from Medicare, which is open to Americans above the age of 62. Medicare allows you to change plans if needed and depending upon eligibility.

3. Ignoring Social Security Benefits

Social Security holds myriad benefits for retirees. These include Social Security bonus, tax savings and other incentives.

Depending too heavily on Social Security payouts or lack of confidence in the system afflicts most Americans. Should you figure among them, visit the Social Security website and view available options for managing your money.

There are several ways to maximize your Social Security earnings upon retirement. These are fairly easy. On average, Social Security will fetch about $1,800 per month.

Higher if your contributions are more. Once you have near astute estimates of how much you can expect from Social Security, include the amount in your retirement financial plan.

A married couple can derive more benefit from Social Security. You can stagger your Social Security benefits by claiming later and allowing more money to collect with your or spouse’s account.  You can find a lot of these details on the Social Security website. One thing to look for is how to collect Social Security bonuses.

Also, it is no longer advisable to wait till you grow much older to claim Social Security benefits, unless it is affordable or necessary.  Good retirement financial planning also involves making great use of Social Security resources. If in doubt, email, call or visit your nearest Social Security offices.

4. Not Investing in Annuities

Understandably, investing in annuities can be a very bad choice for a major reason: they are pricey. Despite this inherent drawback, annuities offer some excellent benefits. They offer steady income post-retirement when you have no active source of earning such as job or business.

Annuities allow you to receive income for the rest of your life or for a specific number of years, depending upon your choice. You can opt payment for every month or quarterly, half-yearly or annual payments too. The money you get is directly proportional to the amount you invest.

Considering these factors, investing some money in annuities is not a bad idea, despite their relatively higher subscriptions. However, you need to be very cautious in selecting the right kind of annuity product that suits money requirements after retirement.

This can prove a bit complex. A good financial advisor can guide you to an excellent annuity plan. There are several types of annuities. Finalizing one yourself can prove confusing. Instead, experienced financial advisors can lead you to the right ones.

Though annuities cost much, the lifelong income guarantee makes them worth investing. However, these cannot be the sole source of income upon retirement. You can include annuities in the portfolio during retirement planning. The money would be welcome after retirement.

5. Dropping IRA/ Roth IRA

Individual Retirement Arrangement or IRA is a must if you are looking at happy retirement. Missing out on these can be sacrilegious to any retirement planning.

There are two IRAs available: Traditional IRA and Roth IRA. Both offer distinct benefits to retirees. They come loaded with tax and income benefits.

You can find a lot about IRA and ways to invest through a good financial advisor. There are also excellent online resources that are available for planning retirement financials from reputed sources. Investing in these while young helps your money grow and saves taxes.

Traditional IRA allows contributing pre-tax money which reduces your taxable income for the financial year and allowing saving some taxes. For example, if your taxable income is $50,000 and you contribute $2,500 to a traditional IRA, taxes will be charged on $52,500 unless you have other tax saving investments.

The amount contributed to the traditional IRA grows. You can withdraw the amount upon retirement. Amounts withdrawn post retirement are taxed at lower rate.

Roth IRA gives a different benefit for retirees. You contribute while earning. Here, your entire income is taxable, regardless of contributions to Roth IRA. This means, if you are contributing $2,500 towards Roth IRA from $50,000, you will pay taxes on the full income.

When withdrawing the amount at retirement, the entire amount- which includes your contribution too, is exempted from all taxes.

Inland Revenue Service website states, IRA contribution for 2018 is capped at $5,000 per year. Those above 50 can contribute up to $6,000 every year towards traditional or Roth IRA. IRS also makes possible to include 401k retirement plans in traditional and Roth IRA.

6. Leaving Aside 401(k)

Consider 401(k) from Inland Revenue Service (IRS) while working. 401(k) allows you to defer receiving full payment from an employer. Instead, you get only part of the salary. The deducted amount is contributed by your employer in a 401(k) account you opt for.

The money contributed to 401(k) is not taxed until paid out.

This feature helps collect money for retirement. The IRS does not tax your deductible amount. Instead, it is taxed when you get the money at retirement. Hence, it attracts much lesser taxes.

401(k) allows tax savings while helping you build a considerable retirement fund. You can step up contributions to 401(k) regardless of what an employer pool in. There are various retirement plans available from the IRS. Consider these during planning for retirement financials.

A common mistake most Americans commit is cashing out 401(k) while leaving employment for changing jobs. Doing so does not help you. Instead, money from 401(k) that could be useful after retirement gets depleted before you reach 60.

Though you may continue contribution after cashing out 401(k) from a previous employer, money accumulated will be lesser. You would have paid a very high rate- 10 percent- a tax on these withdrawals.

7. Underestimating Retirement Period

People in America have a longer lifespan than many other countries. Chances are, you may be alive for very long after retirement. This puts you at great risk of running out of money at a very advanced age. Older people need more money for healthcare and daily living.

At such an advanced age, it would be impossible to find any gainful employment. While planning for retirement financials, never peg your lifespan to a fixed number of years. You may well outlive the projected age and encounter financial doldrums.

Plan retirement financials expecting to live much longer than you anticipate. This is possible by considering your health and overall medical condition now and expected one at the time of retirement.

Never make any plans on a projected number of years you are expected to inhabit Earth. No pun intended, but such projections can prove suicidal for financial well-being.

8. Thinking about Relocation

If you are among those Americans considering to relocate to a city or state known to be retiree-friendly, think again. Generally, Americans consider relocation after retirement for one main reason: the cost of living in the new place.

While taxes on retiree income could be lower in one state, they might charge a higher estate tax. This means you end up paying more than your hometown.

Relocation also involves lots of expenses such as moving house. Settling in a new area can prove traumatic, though not severe enough to cause any serious impact on your mental or physical health.

Others are even more adventurous: they plan to retire in a foreign country with an altogether different culture and infrastructure.

Before you consider relocation, find what are costs involved, healthcare facilities, cost of living and several other factors before taking the final call.

Often, retirees have beaten a hasty retreat from their new location to return to their previous homes- and wasted money on the entire circus of moving between two distant locations.

In fact, financial planners and advisors also caution Americans against relocating. Living someplace friendly to retirees is fine, provided you are aware of the hidden cost of such ventures.

9. Maintaining Credit Cards

Not many would-be retirees are aware: having a credit card after retirement can cost a lot of money. Generally, credit cards come with Annual Percentage Rate.

In simple terms, it is how much you will pay for borrowing the money to buy stuff or going on that dream vacation. Credit cards come with high APR. This means you will end up spending a lot more from retirement income to settle credit card bills.

The expense sounds trivial. When added over a period of few months or a calendar year, APR you pay can well be in excess of 28 percent of the total amount spent on a credit card.

Consider getting rid of all credit card dues as part of planning for retirement financials. It will help save money and prevent later grief. Credit cards are notorious for tempting folks to buy stuff you may otherwise not require or even consider.

Weeding credit cards out of your retiree life is one way to ensure mental peace and financial freedom during those golden years of life.

 10. No Inflation Buffers

Regardless of what you invest upon for retirement, ensure they provide a good buffer against inflation. One of the greatest mistakes of Americans planning retirement financials is investing heavily in hedged schemes that come with minimal or low risk.

While your money is safe and fetches some returns with hedge schemes, the growth percentage would most likely be inadequate to beat inflation.

As prices of everything rise upwards, you will find the need to increasingly dig into retirement savings to meet living costs. Understandably, nobody can realistically project inflation rates.

But you can always create a portfolio with moderate and higher risk investments including stocks, Mutual Funds and others that have relatively higher returns, despite greater risks. Hedging your retirement savings too heavily may not help buffer against imminent inflation.

Wrap Up

Most Americans do not engage in planning retirement financials until they are past 40 or even 50. This provides little time for creating a good portfolio that provides financial security and stability after retirement.

Other than housing, transportation and other living costs, you also need to consider the money that would be spent upon leisure after retirement.

Despite retiring, you would still have 24 hours on hand daily. Spending this time can prove arduous without activities that keep you entertained.

This can involve club membership, longer hours on TV resulting in higher power bills and lots more. Consider these elements too and avoid costly mistakes in planning retirement financials.

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