Retirement Mistakes: Common Errors and How to Avoid Them

According to the Federal Reserve, 31% of non-retirees believe their retirement savings are on track, and 69% of adults did not feel their retirement savings were enough.

If you're part of the 69% of people not yet ready for retirement, this guide is for you!



Retirement planning isn't easy, and making mistakes along the way can set you back. But if you avoid common retirement mistakes, you save more effectively and enjoy a more secure retirement. Some people start their retirement savings too late. Others may underestimate how much they'll need for their golden years.

Key Takeaways

• The most common retirement accounts are 401(k)s, IRAs, and pensions.
• Avoid common retirement mistakes for a more secure retirement.
• Seek professional advice for a tailored retirement plan.



Retirement Basics for Seniors

In preparing for retirement, it’s important to understand what retirement means. You also need to know the types of accounts available and how Social Security fits in.

When preparing for retirement, understanding the basics is like having a map and compass. It guides you through the complexities of retirement planning – so you won’t get lost.



Let’s first discuss what retirement is, the types of accounts available, and the role of Social Security.

What Is Retirement?

Retirement is when you stop working full-time and start relying on savings and other income sources. This period should be a time to enjoy life without the daily grind.



Most people's retirement goals include three things. They are: ensuring a stable income, keeping your lifestyle, and covering healthcare costs.

Different Types of Retirement Accounts

There are various types of retirement accounts, each with its own benefits and features. Let’s break down the main ones:

401(k) Plans

This is an employer-sponsored plan that allows you to contribute a portion to a retirement account. Both you and your employer can contribute to it.

401(k) plans come with tax benefits and often include employer-matching contributions.

Individual Retirement Account (IRA)

An IRA offers tax advantages for retirement savings. You can open an IRA on your own, without needing an employer. Types of IRAs include traditional IRAs, Roth IRAs, and Simple IRAs.



Like a 401(k), it also offers tax advantages, making it great for boosting your retirement savings.

Pension Plans

According to a Federal Reserve report, 56% of retirees have pensions as their income source. Pension plans provide a fixed monthly income once you retire. These are usually based on your years of service and salary history.

You might be wondering: Is it possible to contribute to both a 401(k) and an IRA? The simple answer is yes, you can.



As long as you’re qualified, you may open two or more retirement accounts.

Let’s say you have both 401(k) and an IRA. Your employer matches contributions to your 401(k), and you get tax benefits from both accounts. Together, these will help you have multiple income streams and diversify your retirement portfolio.

The Role of Social Security

Managed by the Social Security Administration, this program provides financial help to retirees, disabled individuals, and survivors of deceased workers. It's funded through payroll taxes and designed to replace a portion of your earnings.



In 2024, more than 72 million Americans will collect Social Security benefits.

Social Security is an essential part of retirement planning. You can start receiving monthly benefits at age 62. But remember that you'll get more if you wait until your full retirement age or even later.

Common Retirement Planning Mistakes

Planning for retirement is a complex task, and it’s easy to make blunders. Below are the worst retirement mistakes and how to avoid them:

Underestimating Retirement Needs

A lot of people think they’ll need less money in retirement. A simple rule of thumb is that you might need about 70-80% of your current income to maintain your lifestyle.

How to avoid this mistake:

Start by calculating all potential expenses you’ll have in retirement. This includes housing, food, living expenses, travel, healthcare, and personal activities.



Online retirement calculators can provide accurate estimates and factor in inflation. Using these tools will give you a clearer picture of your future financial needs.

Ignoring Tax Implications

Taxes play a big role in retirement planning. Different accounts like 401(k)s, IRAs, and Roth IRAs are taxed differently when you withdraw money.

Contributions to traditional 401(k)s and IRAs are typically tax-deferred. This means you pay taxes on withdrawals in retirement. Meanwhile, Roth IRAs are funded with after-tax dollars, so withdrawals are tax-free.



Want to minimize tax burdens? Knowing the tax implications of these retirement accounts is key.

For example, putting everything in a 401(k) without considering Roth options can be a big misstep, as you may be taxed heavily on every withdrawal.

How to avoid this mistake:

To mitigate this, consider a mix of taxed-now (Roth) and taxed-later (traditional IRA) accounts. Each account type has contribution limits, so be aware of these limits to avoid penalties.

For 2024, you can contribute up to $6,500 to an IRA and $22,500 to a 401(k). If you're over 50, you can make additional "catch-up" contributions, increasing the limits.



Additionally, consult with a tax advisor to optimize your tax strategy. A little proactive tax planning will help you keep as much of your hard-earned money as you can.

Failing to Diversify Investments

Putting all your money in one type of investment is risky. By not diversifying, you risk significant losses if that investment performs poorly.



For example, your spouse puts all his retirement savings in tech stocks. When the tech market dipped, his portfolio took a big hit. This could have been avoided had he included diversification in his investment strategy.

How to avoid this mistake:

Stocks aren't the only investment option available. There are bonds, mutual funds, Exchange-Traded Funds (ETFs), and real estate. That’s why you should never put all your eggs in one basket.

Think of your investments like a garden. Some plants grow fast and others slow, but together they create a balanced and thriving ecosystem.



To protect your retirement nest egg, diversifying across different asset classes is the answer. A Moorestown financial advisor like Leonard Financial Solutions can help you create a balanced investment plan. We’ll determine the appropriate investment strategy that aligns with your risk tolerance and market conditions.

Misjudging Health Care Costs

Healthcare can be a major expense in retirement, and many people underestimate how much they’ll need. Despite Medicare, seniors still need to pay out of pocket for medical expenses during retirement.



If you assume Medicare will pick up the tab, unexpected medical expenses will quickly drain your savings.

How to avoid this mistake:

No matter your healthcare needs, always account for rising medical expenses in retirement. You should also consider costs for premiums, copays, medications, and potential long-term care. It’s also recommended to purchase supplemental insurance or long-term care policies for your potential costs.

Not Managing Debt Before Retirement

Nobody wants to be buried in debt. Getting out of debt is more difficult in retirement due to a limited income. That’s why it's crucial to manage your debt before you retire.



Similarly, avoid taking on new debt as you get closer to retirement. Let’s say you're considering a big purchase like a car or home renovation. Before making a decision, assess whether it’s an impulse buy or not. Ask yourself questions like: Is it really necessary? Can you put it off or find a less expensive alternative?

This ensures you're cutting unnecessary expenses and prioritizing debt payments.

How to avoid this mistake:

Start by creating a comprehensive debt reduction strategy before you reach retirement age:

• Make a list of all your debts (credit cards, mortgages, and personal loans).
• Prioritize paying off high-interest debts first.
• Consolidating your debts into a single loan with a lower interest rate.
• Negotiate with your creditors for lower interest rates or better repayment terms.
• Keep an emergency fund for extra financial cushion.

Taking Early Withdrawals

Withdrawing money from your retirement account before the age of 59½ usually triggers penalties and taxes. Not only will you lose interest, but you can be charged early withdrawal fees.



If you take out $10,000 early, you might face a 10% penalty and owe income tax on that amount. Early withdrawals will reduce your savings pool and impact your long-term goals.

How to avoid this mistake:

Keep your money in your retirement account until you reach the required age. This avoids any unnecessary costs and helps you build a more secure retirement.

Failing to Seek Professional Advice

Partnering with professionals can help you make better retirement decisions. Look for certified financial planners (CFPs), tax advisors, or retirement specialists with good reputations and credentials.



These professionals can help with wealth management, retirement savings, and investment strategies. You'll want someone who understands your goals and works in your best interest.

Book an Appointment With Leonard Financial Solutions

At Leonard Financial Solutions, we offer personalized advice and help you avoid common pitfalls.

If you need help with anything related to retirement planning, we’ll make the process easier. During your consultation, we’ll discuss your financial goals and offer advice without pushing specific financial products. Our goal is to provide you with a personalized approach to securing a safe retirement.

Remember, it's never too late to start planning. So, take control of your future toward a worry-free retirement journey. Contact us today for a free consultation.