In this article, we take a look at the 15 biggest retirement mistakes you will regret forever. For more such retirement mistakes, go to 5 Biggest Retirement Mistakes You Will Regret Forever.

Retirement is an inevitable stage in every individual’s life. After working for several years, people eventually reach a point where they want to retire and enjoy the fruits of their labor.

However, retirement can be a daunting task if not planned correctly. In this article, we will discuss the importance of retirement planning, its economic impact, and the social costs of poor retirement planning.

The Importance Of Retirement Planning

Retirement planning is of utmost importance due to the uncertain economic conditions and the increasing costs of living in the future. Although planning for an unknown future may seem intimidating, it is important to start planning early and develop a roadmap that can be modified over time.

The first step in retirement planning is to define retirement goals. It is important to contemplate what one wants to achieve during retirement years and how life would look at that stage. Noting down those goals and aspirations can help guide planning efforts.

Another important step is to estimate future expenses, keeping in mind that inflation and rising costs of living can significantly impact those expenses in the long term. According to CNBC, the average inflation rate in the U.S. over the past century (1913-2013) was 3.22%. Thus, planning for higher prices in the future is critical, especially given the rising costs of living.

Financial experts have suggested that individuals should aim to save $2 million for their retirement. This figure has increased from the previous recommendation of $1 million due to changes in the cost of living and demographic trends.

Others advise that individuals should save between 80% to 90% of their annual pre-retirement income or at least 12 times their pre-retirement salary to ensure a comfortable retirement.

Preparing for retirement can be challenging, especially when considering life beyond the age of 70, and this overwhelming thought often leads to inaction. However, developing a flexible plan can help navigate the uncertainties of the future and ensure a comfortable retirement.

Why It’s Never Too Early To Start Planning For Retirement

Retirement planning ensures that one has enough funds to maintain their standard of living during retirement. It is crucial to start planning for retirement as early as possible to take advantage of compound interest and secure a better retirement lifestyle.

The need for retirement planning to ensure financial security is more than ever now due to the reduction or loss of guaranteed income streams.

For example, according to research from Journal of Family and Economic Issues, social security benefits were a significant source of income for the 48 million Americans who received retirement benefits in 2020, representing 33% of their income.

However, with 78 million Americans projected to be over age 65 by 2035, and the depletion of the Social Security reserve fund, benefits are expected to be reduced. Defined contribution (DC) plans have become more prevalent than defined benefit (DB) plans, with only 25% of Americans having access to a DB plan in 2020.

Additionally, less than half of those DB plans were covered by the Pension Benefit Guaranty Corporation, while 60% of Americans have access to a DC plan.

The Impact Of Retirement Planning

Retirement planning positively impacts the economy due to individuals saving and investing, thereby stimulating economic growth. It also reduces the burden on social security and government-funded programs by enabling individuals to support themselves during retirement and avoiding poverty.

Savings increase the capital available for production, contributing to economic growth. Inadequate retirement planning can cause significant social costs. It can lead to a lower quality of life for retirees, increased stress, and health issues.

Moreover, retirees who haven’t planned for retirement may require support from society, creating an additional burden on government-funded programs. This could increase the risk of Social Security and Medicare insolvency, further exacerbating the issue.

Reuters notes that social security and Medicare insolvency can have massive repercussions for retirees in addition to the economy, and according to NIH, social security payroll tax collections have not been enough to cover annual costs since 2010. Once Trust Fund assets are depleted, payroll tax revenue will only cover approximately 75% of scheduled benefits starting around 2036.

However, corporate retirement benefits can be helpful to compensate for any potential drawbacks with social security. In this respect, companies like ConocoPhillips (NYSE:COP), The Boeing Company (NYSE:BA) and Amgen Inc. (NASDAQ:AMGN) are among the most noteworthy corporations that have top-notch retirement plans to offer their employees.

The Boeing Company (NYSE:BA) has a 401(k) plan for its non-unionized employees, as opposed to a pension plan, with The Boeing Company (NYSE:BA) matching 75% contributions on the first 8% of base pay contributions from its employees.

On the other hand, ConocoPhillips (NYSE:COP) pays a 6% match after its employees invest 1% of their income in pay periods. Additionally, ConocoPhillips (NYSE:COP) also offers substitute match of between 0 and 6% based on employees’ ages and the company’s profitability.

Lastly, Amgen Inc. (NASDAQ:AMGN) provides retirement benefits to its employees through its retirement fund, in which the company makes an upfront contribution of 5%, regardless of whether the employees have made the contribution to the plan or not. Amgen Inc. (NASDAQ:AMGN) also offers stock-buying plans for its employees.

With that, let’s proceed to the 15 biggest retirement mistakes you will regret forever.

Methodology

For our research on the topic, we conducted a comprehensive review of various sources, including research articles, government reports, reputable journals, and financial news outlets such as Forbes, CNBC, Morgan Stanley, and US News.

The objective of our research was to identify common themes and patterns among multiple sources to establish a consensus on retirement mistakes. We then ranked these mistakes based on their severity.

Below are the 15 biggest retirement mistakes you will regret forever.

15. Retiring Prematurely

Retiring early may seem appealing, but it could be one of the biggest retirement mistakes you’d regret forever. It’s important to consider the potential drawbacks. If you retire earlier than planned, you risk depleting your savings and being forced to find ways to earn extra income during retirement instead of pursuing your interests.

Many retirement plans, such as 401(k)s and individual retirement accounts, may impose penalties for early withdrawals before the age of 59 1/2. If you retire too soon, you may not be able to access your savings when you need them without incurring fees.

14. Retiring Too Late

It is possible to experience regret if one has dedicated their entire life towards preparing for retirement and then delays enjoying it for too long. For those who have planned accordingly and are financially able to retire, it is essential to consider the potential disadvantages of delaying retirement and remaining in the workforce.

It is easier to make the transition while still in good health, and after years of hard work, it is reasonable to desire the freedom and leisure that retirement offers.

13. Prioritizing Children Over Retirement Needs

It may not be prudent to make financial sacrifices to support your adult children, especially if you are approaching retirement age while they are still in the early stages of their careers. Your children have a longer time horizon to recover from financial setbacks compared to your limited time left before retirement.

According to Martin, a director at BKD Wealth Advisors, many people nearing retirement have had to endure financial hardships in their younger years, such as living in cramped apartments with several roommates and subsisting on low-cost meals.

However, some parents struggle with the notion of allowing their children to undergo similar struggles and, as a result, dip into retirement savings to provide financial assistance.

12. Disregarding Cognitive Decline

Managing an investment portfolio can become exceedingly challenging with even a mild degree of age-related cognitive decline. MacKenzie, president of Saturn Wealth in Gilbert, recommends preparing a healthcare power of attorney ahead of time to mitigate this risk.

According to her, it is advisable to designate someone who can assume control of your account and make sound decisions on your behalf if you are no longer capable of doing so.

11. Filing Social Security Early

According to Morgan Stanley, when contemplating social security benefits, it is essential to consider the impact of age on the amount of benefit received. While an individual may apply for benefits at age 62, the resulting benefit amount may be reduced by up to 30% if they have not yet reached the full retirement age (FRA) designated by the Social Security Administration.

Additionally, those who opt to receive benefits before reaching FRA and continue working may have their benefits reduced further. For every $2 earned over a specified limit – which stands at $21,240 in 2023 – the individual’s benefit will be reduced by $1. Thus, it may be advantageous to delay the application unless there is an urgent need for funds.

For those who can afford to postpone receiving benefits, it is prudent to wait until age 70 to apply. By doing so, they may receive up to 32% more in benefits than if they had applied at FRA, providing greater long-term financial stability during their retirement years.

10. Not Considering the Impact of Taxes

It is important for individuals to carefully consider their retirement income and tax implications when making investment decisions. If an individual expects to be in a higher tax bracket during retirement, it may be advantageous to invest in a Roth 401(k) or Roth IRA. These investments require taxes to be paid upfront, but all future withdrawals, including investment earnings, will be tax-free. 

Alternatively, if an individual expects to be in a lower tax bracket during retirement, a traditional IRA or 401(k) could be a better choice as taxes can be deferred until the time of withdrawal.

Additionally, borrowing from a regular 401(k) plan may have tax consequences. Borrowed funds must be repaid with after-tax dollars, and withdrawals during retirement will also be taxed. Therefore, individuals should weigh the potential benefits and drawbacks before making decisions about borrowing from their retirement accounts.

9. Entering Retirement with Significant Debt

Driving up debt in the years preceding retirement can have significant negative implications for one’s savings. It is essential to maintain a healthy emergency fund to avoid the need for last-minute borrowing or dipping into retirement savings.

Thus, it is prudent to prioritize paying off debts before retirement to minimize financial obligations and reduce the risk of accumulating interest over time.

It is important to note that halting retirement savings to pay off debts may not be the best approach. Experts caution against this strategy and suggest finding a way to balance both objectives simultaneously to maximize long-term financial benefits.

This may involve seeking professional advice or exploring various debt repayment options to manage debt while continuing to contribute to retirement savings.

8. Ignoring Healthcare Expenses

Morgan Stanley states that in a 2021 survey, conducted by Nationwide Retirement Institute, slightly over 50% of retirees express concerns about not having sufficient funds to cover unplanned medical expenses in retirement.

Moreover, two-thirds of retirees are apprehensive about healthcare costs becoming too onerous, while 50% of retirees are only somewhat or not at all confident in their plan to pay for healthcare expenses beyond what medicare covers.

These apprehensions are not unwarranted, considering healthcare cost trends. For instance, the average retired couple requires $315,000 in current dollars to cover medical expenses in retirement, excluding long-term care.

Additionally, today’s 65-year-olds have a 70% likelihood of requiring extended care at some point in their lives, and one in five 65-year-olds will need long-term care for more than five years. It is critical to consider the potential impact of long-term care costs on asset erosion.

7. Overlooking Inflation

Not adjusting for inflation can be one of the biggest retirement mistakes you will regret forever. According to CNBC, financial planner Scott Stratton has expressed concern over inflation as a significant risk factor, especially as retirement periods become more prolonged.

Stratton notes that even with a modest inflation rate of 3%, the cost of living would double every 24 years, and some expenses such as healthcare are growing at rates exceeding 3%. In response to this risk, Certified Financial Planner (CFP) Tim Estes recommends investing in equities as a means to counteract inflation.

He emphasizes the importance of having some investments in the stock market to generate returns above the inflation rate. Estes suggests that a moderately invested portfolio with returns ranging from 6% to 7% can effectively keep up with inflation, even after accounting for withdrawals.

6. Draining Retirement Accounts Early

Forbes notes that retirement plan accounts serve the purpose of catering to an individual’s financial needs during their later years. To ensure maximum benefit, one should refrain from withdrawing funds from their retirement accounts before attaining the age of 59½, as a 10% penalty is applicable on the withdrawn amount. Additionally, income tax on the distribution must also be paid. 

For instance, a $10,000 early withdrawal from a retirement account by an individual in the 22% tax bracket would result in $3,200 in taxes and penalties. Therefore, it is advisable to explore alternative financing methods to avoid incurring such high costs.

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Disclosure: none. 15 Biggest Retirement Mistake You Will Regret Forever is originally published on Insider Monkey.