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Common Retirement Planning Mistakes

5 min read

30 sec brief

5 Tips to Make Sure Your Strategy is Built to Deliver Retirement Security Saving for retirement is never going to be a task that gets filed under “easy.” It’s on you to figure out how much to save, where to save, and how to invest your money. Then, after years of saving you’re also on…

5 Tips to Make Sure Your Strategy is Built to Deliver Retirement Security

Saving for retirement is never going to be a task that gets filed under “easy.” It’s on you to figure out how much to save, where to save, and how to invest your money. Then, after years of saving you’re also on the hook to come up with a plan to take money out of those accounts at a pace that won’t run your funds dry too fast.

One of the best retirement moves you can make today is to make sure you avoid common planning mistakes: 

Common Retirement Planning Mistakes

  1. Underestimating how long you might live. If you’re in good health, you should plan on living into your 90s. That’s not betting on being some freakish outlier. Our increasing longevity translates into this important truth: half of today’s 65 year old women will still be alive at age 88, for men it’s age 86. You want a retirement plan that assumes you will be in the 50% that will be alive a long time. Yet a survey found that just 1 in 5 pre-retirees correctly estimates (or overestimates) average life expectancy. More than 40% underestimate by at least five years. That could mean not saving enough and/or running through your funds too fast.

Head over to a free online retirement calculator — your workplace plan likely has one  — and make sure your expected life span is set to at least age 90. (Retirement planning pros routinely use age 95 to be extra safe. Just saying.) If the results are less than you expect, now’s the time to do some planning tweaking.

  1. Saving too little. If you walked into a meeting of smart retirement planning pros and asked them how much individuals should be saving each year, you would hear a chorus of “at least 10% of salary and 15% is even better.” At that pace you have a solid chance to generate the savings needed to support you for what can be a very long retirement. Yet on average, the all-in savings rate is around 7% to 8% a year. Time to up your saving game.
  2. Underestimating retirement health care expenses. It’s the rare employer that provides retirement health benefits these days. Sure, Medicare will cover plenty, but not all. On average, retirees shoulder about 30% of health care costs, and that will likely run into the six figures. The Employee Benefit Research Institute estimates that a 65-year-old man and woman would need more than $125,000 and $140,000, respectively, to have a high probability of covering their total health care expenses in retirement. (And that excludes long-term care costs.)

You want to make sure your retirement strategy plans for those costs. Saving more in your 401(k) and other retirement accounts is one way to go. You might also want to consider a Health Savings Account (HSA). Multiple tax breaks on HSAs make them an incredibly valuable way to save today to pay for your retirement health care expenses.

  1. Not accounting for big tax bills on your traditional retirement account withdrawals. If you’ve been saving in a traditional 401(k) or IRA, you will be required to take withdrawals in retirement –starting once you turn 70.5 — even if you don’t need the cash. The IRS insists because it wants to collect tax on your withdrawals.

Every penny withdrawn from a traditional account will be taxed as ordinary income. That leaves you a lot less to live on. That’s another reason to up your savings rate. You might also want to explore the value of using an HSA as a supplementary retirement account. All withdrawals from an HSA are 100% tax free when used to pay for qualified medical expenses. That can be a big boost to your financial security in retirement.

  1. Assuming you can work longer. One of the most popular retirement planning strategies is the intention to keep working through your 60s. That makes a ton of sense. But it is not something that you can just fall back on. Many retirees report that they stopped working before they expected. Health issues, downsizing, needing to care for a loved one, were common reasons people stopped working earlier than expected.

Keeping your job skills sharp, and focusing on healthful habits are ways to plan today so you will have a better chance of being able to work later. And the safest bet is to keep saving as much as you can today, so you’ll be ready no matter what the future holds.

If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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