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8 Common and Costly Retirement Planning Mistakes

Retirement planning may not seem like rocket science at first – save as much as you can, figure out when to take Social Security, and draw as little as possible.

But of course any financial plan designed to support you for decades has a lot of moving parts, and you must carefully consider all of those moving parts, how they interact with each other at first and over time, and how external factors could throw monkey wrenches into your whole model.

In our guest post today, we’ll look at eight potentially expensive, and all too common, mistakes made in retirement planning.

Our guest is David Rosenstrock, the director and founder of Wharton Wealth Planning. David earned an MBA from the Wharton Business School and a B.S. in economics from Cornell University and is a Certified Financial Planner.


Most of us look forward to retirement, but it can be a very stressful transition.  Carefully planning your financial future will increase the chance that your golden years will truly be enjoyable.

There are numerous retirement planning pitfalls that you can proactively avoid.  Below is a brief guide to avoiding costly mistakes in retirement planning.  A secure, happy retirement requires savvy planning, saving, and investing.


1. Not Putting a Plan in Writing with the Correct Updated Assumptions


While most people who are near retirement age have a sense of how many assets they have accumulated and how much they will need to spend in retirement, most people fail to have those numbers checked against different market condition scenarios.

Potential retirees should consider testing and updating their plans using a wide range of market returns assumptions, including the rate of inflation and other macro factors. This assumption-testing process can bring to light flaws in a retirement plan while there is still time to take action before retirement.

According to the Transamerica Center for Retirement Studies, although 58% of retirees had a financial strategy for retirement during the coronavirus pandemic, only 18% had it in writing.

A written financial plan is essential as it helps ensure that your savings will last. Facts that need to be considered include debt repayment, living expenses, investments and returns, taxes, as well as the need for long-term care.

As the world economy struggles and inflation continues to edge higher, one needs to challenge the conventional wisdom regarding expected annual rate of return, inflation rate, GDP growth, etc., because any one of these factors can easily derail a carefully crafted retirement plan.


2. Not Using a Retirement Projections Calculator


It’s important to consider how your income and expenses will change in retirement. Every person who plans to retire should use a retirement calculator in order to determine just how much money they will need in order to retire while maintaining a comfortable standard of living.

Some expenses like health care and travel are likely to increase, but many pre-retirement recurring expenditures could be reduced or eliminated.

According to the Employee Benefits Research Institute, while median household expenses decline with age, housing-related expenses remain the single largest spending category. Healthcare expenses are the second largest component, and these steadily increase with age.

The 4% rule is a guideline stating that you should take out only about 4% of your retirement savings annually. Each person’s situation is unique, but some guidelines can help you prepare.


3. Not Choosing the Optimal Retirement Age or Retiring Too Early


Staying on the job for a few additional years can boost your income in retirement by one-third or more. The Social Security Administration defines age 66 to 67 as the typical retirement age for most people, but many Americans don’t wait that long.

You can avoid the early filing benefit reductions imposed by Social Security by working until your full retirement age (as defined by the IRS). At the same time, you can keep contributing to your retirement savings plan, building additional balances that can be invested in the market.

For many people, retirement means transitioning from the full-time career or job they’ve held for many years. But there are many other possibilities, including part-time work in your current job or career; a new job or career, either part-time or full-time; a bridge job for a few years until full-time retirement; self-employment or business ownership; or a volunteer position for a cause you believe in.


4. Taking Social Security Too Early


The majority of retirees choose to begin receiving Social Security payouts within a few months after turning age 62 or immediately after they stop working, even though it is almost always beneficial to delay the benefits.

A National Bureau of Economic Research working paper, written by Stanford economist John B. Shoven, concludes that most retirees are leaving money on the table.  There are “spikes” in the retirement age data at ages 62 and 65.

Some psychologists argue that early Social Security eligibility at age 62 and perception of “normal” retirement age at 65 serve as reference points that influence people’s decisions to retire at these ages.


5. Underestimating Health Care Costs


Health care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense and navigate the system.

A study from the Employee Benefit Research Institute estimates that a couple with drug costs at the 90th percentile throughout retirement would need savings of about $325,000 by age 65 to have a chance of covering their health care expenses during retirement.

Even for those on Medicare, health care costs can still erode spending power. Out-of-pocket expenses for people in retirement have risen over 50 percent since 2002. Long-term care costs can be even less predictable than out-of-pocket costs.

About half of people 65 and over won’t incur any long-term care expenses, and an additional quarter will pay less than $100,000. Fifteen percent, however, will pay $250,000 or more.



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6. Underestimating How Long You’ll Live


Evidence suggests a prevailing tendency for people to underestimate their longevity.  There are gender, socio-economic and health differences in longevity estimates, but in general, people do not appear to understand the true extent of the risk.

In order to have enough money for your retirement, many retirement experts suggest that you plan to live into your late eighties or even your nineties. Planning to live only into your seventies could mean that you will run out of money early as you outlive your expectations.


7. Choosing the Wrong Investment Strategy


There are many investment strategies available, from aggressive to conservative. Generally, those who are younger are advised to invest more aggressively, tapering to more secure investments as they grow older.

When you retire, you’ll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It’s common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds.

Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement funding strategy. On the other hand, if you invest too heavily in growth investments, your risk is heightened.

It is common for a retiree who has worked at the same company for many years to accumulate a large amount of that company’s stock in his or her portfolio. Some retirees choose not to diversify because they have comfort in being invested in their employer’s stock.

A retiree’s investment portfolio, however, should hold no more than 5% to 10% of any one particular stock, so that the portfolio can be protected and properly diversified for risk management purposes.


8. Not Managing Taxes and Choosing the Right Retirement Accounts to Draw From


It is also important to match different types of accounts (i.e. taxable, retirement, etc.) with particular investment strategies.  Not regularly contributing to tax-efficient accounts is a common mistake in financial planning.

Making increased contributions to retirement accounts including 401(k), 403(b), IRA, SEP IRA, Roth IRA, Spousal IRA (if your spouse not in the workforce), and “backdoor” Roth IRAs can help put you on track to be prepared for retirement.

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s.

The reason these plans are so important is that they combine the power of compounding with the benefit of tax-deferred (and in some cases, tax-free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis.

No two people will have the exact same return on their retirement savings accounts. But, those who follow a specific long-term investment plan can expect to have better average returns than those who do not.


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3 thoughts on “8 Common and Costly Retirement Planning Mistakes”

  1. For a married couple. each age 65, there is a 25% likelihood that on of you will be alive into your 90’s. If hyou don’t plan for it uou plan to fail

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. “The majority of retirees choose to begin receiving Social Security payouts within a few months after turning age 62 or immediately after they stop working, even though it is almost always beneficial to delay the benefits.” You get higher SS payments by delaying, but in the retirement simulations I’ve run, taking a lower payment at 62 results in a larger net worth at age 82, because I’m taking less out of my IRA accounts (traditional & Roth) between the ages of 62-70. There may be a zone where I’m in a sweet spot of both the (high) amount of savings I’m working with and an annual budget in today’s dollars of about $52k for this result to happen; but I would encourage everyone to check the SS web site for an estimate of what they would receive at various ages and plug those amounts into their favorite retirement calculator to see the effect on their projected total net worth later.

    • True, Dean. The break-even point is in the low-to-mid 80s depending upon the assumptions one uses.

      A lengthier discussion, and a better SS calculator can be found here.



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