Imagine reaching retirement only to find your savings aren’t enough. According to the Pew Research Center, this is a reality for almost a third of current retirees who are considering going back to work to cover their living expenses. This shows why planning for retirement is so important for everyone.
But planning for retirement isn’t the same for everyone; what you should do in your 20s is different from what’s important in your 50s. And you can make financial mistakes at any age that can hurt your future.
We’ll take a closer look at common retirement planning mistakes to avoid in your 20s, 30s, 40s, 50s, and beyond. Our goal is to give you practical advice so you can feel more confident about your financial future and enjoying your retirement years.
Mistakes to avoid in your 20s & 30s
Your twenties and thirties are a prime time to start thinking seriously about retirement. The earlier you begin, the more time your money has to grow. Here are some key missteps to avoid during these foundational years:
Not starting early enough
Time is a powerful ally in retirement savings. The concept of compounding means your earnings can also generate earnings, leading to significant growth over the long term. Delaying saving, even by a few years, can considerably reduce the potential benefits of compounding. Remember that even small consistent contributions made early in your career have a big impact on your future retirement funds.
You may also want to look into investing to help your money grow over time. This will also help your retirement fund.
Ignoring retirement accounts
Failing to take advantage of available retirement savings plans is a common misstep. Employer-sponsored plans like 401(k)s often come with an employer match, which is essentially free money to boost your savings. Additionally, exploring and contributing to individual retirement accounts (IRAs), such as Roth or Traditional IRAs, can offer valuable tax advantages and further enhance your retirement nest egg.
Focusing solely on short-term goals
While enjoying your current lifestyle is important, prioritizing immediate expenses and desires to the detriment of long-term savings can be a mistake. Creating a budget that allocates a portion of your income towards retirement savings is crucial for balancing your present needs with your future financial security. This budget should also be part of a broader financial plan that considers all your financial goals, from paying off debt to building an emergency fund.
Taking on too much debt
High-interest debt, such as credit card balances and significant student loans, can make savings for retirement difficult. The interest payments can consume funds that could otherwise be invested for your future. Also, carrying substantial debt into retirement can limit your financial flexibility and overall well-being.
It’s still possible to save for retirement even if you have debt, especially if you’re getting an employer match. The long-term benefits of compounding and that “free money” can outweigh the interest costs on some debt.
Mistakes to avoid in your 40s & 50s
By your forties and fifties, you’re likely in the thick of your career. This is a really important time to check in on your retirement plans and make any necessary adjustments. Here are some common missteps to watch out for during these mid-career years:
Not catching up on savings
Maybe you feel like you haven’t saved enough so far. That’s okay, but now’s the time to get serious about boosting your savings. Many retirement plans have special rules that let you put away even more money once you hit a certain age – these are called “catch-up” contributions. Not using these can make it harder to reach your retirement goals.
Neglecting estate planning
As you get older, it’s important to think about what happens to your things if something unexpected happens. That’s where estate planning comes in. A big mistake is not having important papers like a will (to say who gets your assets), a power of attorney (to handle your finances if you can’t), and healthcare directives (to say what kind of medical care you want). Also, don’t forget to review and update your beneficiary on your retirement accounts.
Overlooking healthcare costs
Healthcare can be a big expense when you retire, so it’s smart to plan for it now. Some people don’t realize how much they might need to spend on doctors and medicine later. If you can, look into a Health Savings Account (HSA). It has tax benefits that can help you save for those costs.
Making emotional investment decisions
The stock market can go up and down, and it’s easy to get worried when it drops. But making quick decisions based on fear, like selling your investments when the market is down, can hurt you in the long run. Also, be careful about chasing after the latest “hot” investments without really understanding them. It’s usually better to stick with a plan you understand.
Mistakes to avoid in your 60s & beyond
As you approach and enter retirement, the focus shifts to making your savings last. Here are some common missteps to be aware of during this phase of life:
Withdrawing too much too soon
One of the biggest risks in early retirement is taking out too much money too quickly. If you spend down your savings too fast in the initial years, you could find yourself with less than you need later on. It’s important to have a plan for how much you can safely withdraw each year so your money lasts.
Underestimating longevity
People are living longer these days, and it’s a mistake not to plan for a potentially long retirement period. If you underestimate how many years you’ll need your savings to last, you run the risk of outliving your money. It’s wise to plan for a longer lifespan.
Ignoring inflation
The cost of things like groceries and healthcare tends to go up over time – that’s inflation. A mistake is not factoring this into your retirement planning. If your retirement income doesn’t keep pace with inflation, your money won’t go as far in the future. It’s important to have some investments that can potentially grow faster than the rate of inflation.
Not considering tax implications
When you start taking money out of your retirement accounts, you’ll likely have to pay taxes on some of it. A mistake is making withdrawals without understanding how they’ll be taxed. Also, there are rules about when you have to start taking money out of certain retirement accounts (these are called Required Minimum Distributions, or RMDs), and not planning for these can lead to unexpected tax bills.
Final thoughts
Getting ready for retirement can feel like a long road, but knowing the common bumps along the way can make a big difference. Staying aware of your financial situation, making smart choices along the way, and maintaining flexibility will help you safeguard your future and build the retirement you’re hoping for.
