Top 4 Common Retirement Mistakes and How to Avoid Them

running out of money in retirement

There are plenty of ways to make retirement planning less stressful. But, people are oftentimes too caught up in saving for vacations or paying off debts to dedicate much effort to prepare for retirement. We all make mistakes. But, do you make retirement mistakes?

Considering the significant income drop you’ll experience after retiring from your current line of work, planning for retirement is one of the most important things you’ll ever do in your life! The last thing you want to do is reach your 60s with little saved for retirement.

To clear up any confusion about retirement planning and help you stay on track to meet your goals, here are some common mistakes you should avoid.

4 Common Retirement Mistakes and How to Avoid Them

Investing Too Aggressively

When you’re in your 20s and 30s, you can afford to take on more portfolio risk because you have a majority of your working years still ahead of you.

However, market volatility poses a retirement risk for people in their 50s and early 60s. You’re too close to retirement to afford to lose a big chunk of your portfolio’s value.

This means you should avoid investing too aggressively and instead, shift your portfolio’s emphasis to more moderate investments. Consider mutual funds and bonds as you approach your late 40s, 50s, and early 60s.

At this stage of your life, stability matters much more than raking in huge gains, so don’t risk your life savings by gambling on the latest cryptocurrency or flashy tech stocks in hopes of scoring a huge ROI in the final stages of your retirement planning phase. This can be one of the big retirement mistakes.

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Investing Too Conservatively

According to a 2016 survey from Wells Fargo, about 60% of Americans are investing too conservatively for retirement. This means that many folks are prioritizing minimal losses over maximum gains, even when they’re still in the prime working years.

Obviously investing too aggressively can lead to problems, but few people realize how the opposite is just as true. Investing too conservatively can lead to lower-than-expected nest egg values in retirement.

Plus, you’ll be left vulnerable to running out of money during retirement. You may be forced to seek out alternative income opportunities to supplement your tiny Social Security checks.   

Underestimating Your Future Income Needs 

For whatever reason, humans seem much more inclined to underestimate how much money they’ll need to cover everything from tax bills to retirement expenses.

Perhaps we don’t account for inflation well enough. This causes the price of everything to rise while we’re still planning to live on a similar budget as we did in our working years. This just isn’t feasible because things get more expensive each year, and once you retire, you start living on a limited budget!

To avoid running out of money in the middle of your retirement years, be sure to save significantly more money than you anticipate needing. Even if your house is, or will be paid off, your expenses likely won’t decrease as much as you think they will later on.

Also, remember that you could very well live to be 100 with today’s technological advancements and healthcare innovations. So don’t plan all the way up to your average life expectancy and stop there. That’s another one of the retirement mistakes.

You’ll want to have at least 25 years’ worth of your annual budget saved by before retiring and look into passive income opportunities to protect your income once you finally retire.

Having the Wrong Annuity

If you want a reliable retirement income with some interest on top, then picking the right annuity is important. People buy annuities to manage their retirement incomes because annuities provide periodic payments for a set amount of time, death benefits, and tax-deferred growth.

There are two types of fixed annuities, life and term. These are ideal investments because you will make payments towards this annuity for several years, then receive payments back with interest when you retire.

If you die before the sum has been completely paid out, either your beneficiary will receive the remaining amount or the insurance company will keep the rest.

The “wrong” annuity depends on a variety of factors. For instance, a fixed annuity paying 6% interest wouldn’t be a good deal if the market is currently averaging 8-9% returns.

However, a variable annuity can be riskier because you’re not guaranteed a certain interest rate. On the flip side, it could pay out more than what average market returns currently are.

Planning for retirement isn’t easy when you’re living close to your means, juggling other debts and financial responsibilities, and wanting nothing more than to plan a vacation instead.

It takes diligence, professional expertise, and an appreciation for delayed gratification. But, if you avoid the most common retirement mistakes, you’ll be well on your way to securing a happy, healthy retirement.

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