Retirement planning is complex. There are a lot of variable to consider, like expenses, medical needs, Social Security, and investments. There’s a lot of guessing, estimating, and assuming—how can you possibly know how long you’re going to live? And there’s also a lot of calculating—you need to get a firm grasp of your future expenses, income buckets, and financial needs and obligations.
Because planning for retirement is so multi-pronged and complicated, it’s prone to error. Many people make fatal, yet avoidable, retirement planning mistakes that ruin all of their most thought-out plans and goals.
If you want smooth sailing for your retirement, then you definitely want to avoid making these seven mortal retirement planning mistakes at all costs.
1. Making up a Number
We see a lot of people make the mistake of just picking a big number out of thin air and deciding that’s their retirement savings goal. They think that $500,000 in savings is good enough, or $1 million will get them through all their years in retirement.
But choosing a number isn’t useful in your retirement planning unless it’s a good number. You need to do your calculations, like figuring out your expenses and considering your life expectancy, to be able to come up with a number that makes sense for you and your unique circumstances. Don’t pick a number because that’s what your neighbor is aiming for.
2. Forgetting Inflation
Forgetting inflation is one of the top things that can kill your retirement. What you’re spending on your expenses now won’t be what you’ll spend on those same expenses in the future. Everything’s going to be more expensive and the US dollar won’t go as far in the future as it does now.
You need to add inflation to all of your expenses to get a realistic portrayal of your expenses. In general, add 3% for inflation for every single year.
3. Thinking You’re Invincible
Just because you’re young and healthy now doesn’t mean that you’ll stay that way. It can be painful and uncomfortable to think about the day when you might have a critical illness or need help just to get out of bed, but thinking about it now is necessary in order to be able to plan for the worst. You’re not a superhero. You could get seriously ill. And the high cost of medical treatment could ruin your retirement saving plans. Be practical. Get long-term care insurance so medical costs don’t eat up your savings.
4. Taking Social Security Too Early
It can be mighty tempting to apply to get your Social Security benefits as soon as you’re eligible, but doing so will be worse for you in the long run. If you don’t absolutely need to apply for them, plan to wait a few years. You’ll end up with significantly higher benefits if you do.
5. Delaying Retirement Planning
Even though you won’t be retiring for another 10 or 20 years doesn’t mean that you shouldn’t be planning for it now. The earlier you start planning and saving, the better off you’ll be. You’ll have more time to accrue compound interest and let your money work for you, so you’ll actually have to save less money to get more. Don’t delay. It’s one of the worst retirement planning mistakes you could make.
6. Not Updating Your Plan
If you did start retirement planning early—good for you. But you can’t stop now. Planning for retirement isn’t a one-shot deal. You have to update your plan. After all, your levels of income could change, your expenses might have increased, markets rise and fall, your health might have changed, and you need to take these changes into account to ensure that your plan stays relevant.
7. Investing Too Aggressively, or Not Aggressively Enough
Bad investment decisions can ruin everything you’ve planned for. Being passive and only investing in your company’s stock instead of diversifying can make you fall short of your retirement savings goals. Realizing you don’t have enough money to retire and taking unnecessary investment risks can put your bank account down to zero.
Investing too aggressively or not aggressively enough can both be retirement planning mistakes.