Planning for retirement can be complex, but avoiding common pitfalls can help ensure a more comfortable and financially secure future. Below are some of the most frequent mistakes people make when preparing for retirement and how to avoid them.

1. Putting off saving for retirement

Retirement is lightyears away. Do you really need to start saving as early as your 20s? Yes.

One of the biggest mistakes you can make is delaying retirement savings. 92% of American workers think they’re behind (or very behind) on retirement savings. Why? Inflation and cost of living are major factors, but the most common reason is that people just aren’t starting their nest egg early enough.

Many people think they have plenty of time, but the earlier you start, the more you benefit from compound interest. By saving early, even small contributions can grow significantly over time. Waiting until later in life may require much larger contributions to reach the same financial goals, putting unnecessary pressure on your budget. So start saving early, even if you can only contribute $50 a month!

2. Not developing a spending and saving plan

A successful retirement requires a clear plan for both saving and spending. Without understanding how much you need to save for retirement or how much you’ll need to spend during it, it’s easy to overspend or under-save. 

Developing a detailed retirement budget helps ensure that your financial resources last throughout retirement. Your retirement budget should focus on 3 key areas:

1. Mandatory expenses: Your non-negotiable expenses include things that you can’t live without, like medical expenses, housing, transportation, utilities, insurance, and more.
2. Discretionary expenses: This area focuses on your ‘wants’ such as traveling, activities with your family, and more. These items may change over time, but account for what you desire today.
3. Retirement income: The money has to come from somewhere! Add up your income from Social Security, pensions, retirement accounts, investments, and more.

3. Relying on Social Security (and claiming it too early)

Social Security is a crucial part of retirement income for many, but relying on it as the sole source of income is risky. Social Security benefits alone may not cover all your expenses, and claiming benefits too early can reduce the monthly payout for the rest of your life. 

To maximize Social Security benefits, it’s generally better to wait until full retirement age or even later, if possible. For example, in 2024, if you wait to collect benefits until age 70, your maximum benefit would be $4,873. However, if you collect benefits at age 62, your maximum benefit would be $2,710.

So when is the best time to collect Social Security benefits? Unfortunately, there is no right or wrong answer—it depends on your circumstances and retirement goals. A financial advisor can help you make the best decision based on your retirement savings, income, and spending plan.

4. Disregarding health care costs

Healthcare can become a significant expense during retirement, especially as people age and require more medical care, and the costs rise every year. According to Fidelity, the average retiree will need roughly $165,000 to cover health care costs in retirement in 2024.

Medicare doesn’t cover everything, and unexpected health issues can deplete savings quickly. Planning for health care costs, including insurance premiums, out-of-pocket expenses, and potential long-term care, is essential to avoid financial strain. While some health events are simply unavoidable, it’s also important to maintain a healthy lifestyle in retirement and prioritize activity and diet. 

5. Not having a withdrawal strategy

Withdrawing funds from retirement accounts without a strategy can lead to financial problems later in life. Taking too much too soon can cause you to outlive your savings or incur penalties. While withdrawing too little might mean missing out on a comfortable lifestyle. Establishing a withdrawal strategy, such as the 4% rule, helps ensure your money lasts as long as you need it. 

You also need to consider the tax implications of your withdrawals. Similar to your career life, your taxes will depend on your income in retirement for any given year, so you’ll want to time your withdrawals and investments accordingly. Your financial advisor or tax professional can help you create a withdrawal plan that incurs the least amount of tax burdens.

6. Ignoring inflation

Just like taxes, you can’t escape the effects of inflation of retirement.

Overlooking inflation is a common mistake that can drastically decrease your purchasing power over time. Inflation reduces the value of your savings, meaning you’ll need more money in the future to maintain the same standard of living. 

Let’s say, for example, that you budgeted your annual retirement expenses at $75,000. After 20 years at a 2.5% annual inflation rate, you would need over $104,000 to match your original purchasing power.

When planning for retirement, it’s important to account for inflation in your savings and investment strategies to ensure you’re financially prepared for rising costs.

7. Planning to work forever

46% of people plan to work full-time beyond age 62. If you are healthy and truly want to continue that lifestyle, great! However, as you plan for retirement more intentionally, you may be surprised that you have other goals outside of work.

Many people assume they’ll work well into their later years, but health issues, job market changes, or other unforeseen circumstances can prevent that. Relying on the assumption that you’ll always be able to work can leave you unprepared if you’re forced to retire earlier than expected. It’s important to save as if you’ll retire at a traditional age, even if you plan to continue working. When it comes to retirement savings, it’s better to be safe than sorry.

8. Overlooking estate planning

Estate planning isn’t just for the ultra-wealthy; it ensures that your assets are distributed according to your wishes and helps reduce legal and tax complications for your heirs. Without a proper estate plan, your family could face significant difficulties during an already challenging time. Creating a will, setting up trusts, and designating beneficiaries are critical steps in estate planning.

A better way to retire

Avoiding these common retirement mistakes can significantly improve your financial security in retirement. By starting to save early, developing a solid spending and saving plan, and preparing for expenses, you can enjoy a more comfortable and worry-free retirement.

As you begin your retirement planning process, you will run into many different savings and investment vehicles. If your goal is to diversify your portfolio, strengthen your legacy, and potentially earn higher returns, alternative investments may be the best choice for you. Get in touch with our team at Hedgehog Investments to learn more about our alternative investment model and start building better wealth!