Three Common Retirement Planning Pitfalls and How to Avoid Them

Retirees who have saved diligently for years may find it unsettling to actually access their portfolios. Concerns about when to begin taking withdrawals, how much is too much, and what to do if you outlive your savings are reasonable, but if you only pay attention to drawdowns, you might be missing other threats to the longevity of your savings.

Let’s examine three typical errors that can have a detrimental effect on your retirement income and offer solutions for each.

Navigating the Journey to a Secure Retirement

Retirement is a time to relax, enjoy life, and spend time with loved ones. However, it can also be a time of financial uncertainty. Many people worry about whether they’ll have enough money to cover their expenses and maintain their desired lifestyle.

One of the best ways to ensure a comfortable retirement is to plan ahead. However, even the most well-intentioned individuals can fall into common retirement planning pitfalls. Here are three of the most common mistakes to avoid:

1. Not Having Defined Goals

Clear retirement goals are essential for developing a successful retirement plan. Without goals, it’s difficult to measure your progress and make informed decisions. Goals should be specific, measurable, achievable, relevant, and time-bound (SMART).

2. Not Starting Early Enough

The earlier you start saving for retirement, the more time your money has to grow through compounding interest. Even small contributions made early on can make a significant difference in your retirement savings.

3. Unrealistic Growth Expectations

It’s important to be realistic about the expected growth of your retirement investments. Don’t set unrealistic expectations that could lead to disappointment or financial hardship.

Understanding the Importance of Defined Goals

Having defined retirement goals is crucial for several reasons:

  • Provides Direction: Goals give you a clear direction and purpose for your retirement planning efforts. They help you prioritize your savings and investments and make informed decisions that align with your desired lifestyle.
  • Measures Progress: Goals serve as benchmarks to measure your progress and track your success. By setting specific goals, you can monitor your progress and make adjustments as needed to stay on track.
  • Motivates Action: Goals can be a powerful motivator. Knowing what you’re working towards can inspire you to take action and stay committed to your retirement planning journey.
  • Reduces Uncertainty: By having clear goals, you can reduce the uncertainty and anxiety associated with retirement. Knowing what you need to achieve can give you peace of mind and confidence in your future.

The Power of Starting Early

The power of starting early for retirement cannot be overstated. The earlier you begin saving, the more time your money has to grow through compounding interest. Even small contributions made early on can make a significant difference in your retirement savings.

Compounding Interest: A Powerful Tool

Compounding interest is the interest earned on both the principal amount and the accumulated interest. Over time, compounding interest can significantly increase your retirement savings.

Example of the Power of Early Saving

Consider two individuals, Sarah and John, who both want to save $1 million for retirement. Sarah starts saving at age 25 and contributes $500 per month. John starts saving at age 35 and contributes $1,000 per month.

Assuming an average annual return of 7%, Sarah will have accumulated $1 million by age 65. John, despite saving twice as much per month, will only have accumulated $732,000 by age 65. This difference highlights the power of starting early and the impact of compounding interest.

Setting Realistic Growth Expectations

It’s important to be realistic about the expected growth of your retirement investments. Don’t set unrealistic expectations that could lead to disappointment or financial hardship.

Factors Influencing Investment Growth

Several factors can influence the growth of your retirement investments, including:

  • Market Performance: The overall performance of the stock market can significantly impact your returns.
  • Asset Allocation: The mix of investments in your portfolio, such as stocks, bonds, and real estate, can affect your risk and return profile.
  • Investment Fees: The fees associated with your investments can eat into your returns over time.
  • Inflation: Inflation can erode the purchasing power of your savings over time.

Avoiding Common Pitfalls: A Guide to a Secure Retirement

By understanding and avoiding these common retirement planning pitfalls, you can increase your chances of achieving a secure and comfortable retirement. Remember, the key is to start early, set realistic goals, and make informed investment decisions.

Retirement planning is an essential part of securing your financial future. By avoiding common pitfalls and taking proactive steps, you can increase your chances of achieving a fulfilling and financially secure retirement.

Collecting Social Security too early

The age-old conundrum is this: Should I begin receiving Social Security benefits as soon as I become eligible at age 62? A lot of Americans choose to do so, but if you begin receiving benefits before you reach full retirement age (66 or 67, depending on your birth year), you will have to accept lower payments for the rest of your life.

The table below illustrates how much more money you could receive each month if you can wait even a few years, have a spouse, and are in good health.

For instance, a person who receives $1,706% from Social Security beginning at age 2062% would receive 30% less in monthly benefits than if they had waited until full retirement age (FRA) of E2%80%94 and approximately 20% less than if they had waited until age 70.

A 62-year-old begins taking Social Security and receives a monthly benefit of $1,706. If they wait until full retirement age (67

Age 62 67 (FRA) 70
Monthly benefit $1,706 $2,437 $3,022

Holding off on collecting can also help your portfolio last longer. While it is true that you will need to rely solely on your savings if you retire before receiving Social Security benefits, deferring can help protect your portfolio in the long run by providing you with guaranteed increased income for the rest of your life.

Moreover, your Social Security benefit is increased in response to inflation, unlike the majority of other retirement income sources, so higher cost-of-living adjustments translate into larger checks. Delaying benefits is only practical, of course, if you don’t need the money right away. To make up the difference if your paycheck ends before Social Security begins, talk to a financial planner about your income requirements and longevity expectations.

Selling assets in a downturn

It could seem that you would have to sell more of your assets to reach your retirement income target if your first few years of retirement coincide with a market downturn. This would leave you with fewer shares and restrict the potential for your portfolio to recover during a future market rally. It is more difficult to recover if the decline is severe or lasts for a long time.

You might not need your portfolio to last as long or keep growing to fund a long retirement if a similar decline happens later in your retirement. In that case, you might be in much better shape to fund withdrawals.

This graph illustrates how two retirees with the same portfolios and yearly withdrawal amounts could have quite different outcomes based on the timing of a market decline.

what are the three biggest pitfalls to retirement planning

Source: Schwab Center for Financial Research

This chart is hypothetical and for illustrative purposes only.

The starting balances of both hypothetical investors were $1% million. They made an initial withdrawal of $50,000 and increased their withdrawals by 2% annually to account for inflation. Investor’s portfolio assumes a negative 2015 return for the first two years and a positive 2016 return for the years 203%E2%80%9318. A%206%%20return%20for the first eight years is assumed by %20Investor%202’s%20portfolio%20; additionally, a%20%E2%80%9315%%20return%20for%20years%209%20and%2010,%20and%a%206%%20return%20for%20years%2011%E2%80%9320 1.

So, whats an investor to do?

  • Modify your allocation: You might want to consider allocating a part of your assets to investments that are more resilient to fluctuations in the market. To help with funding expenses, we advise retirees to retain a portion of their retirement portfolio in cash or cash alternatives. Next, think about putting some of it into less volatile assets like premium short-term bonds or short-term bond funds. This can be crucial early in retirement as it can help lower risk during a downturn.
  • Stay adaptable: It’s critical to maintain flexibility in your spending plan regardless of when a downturn happens. Your portfolio will typically have a better chance of withstanding a decline if you can cut back on spending and/or postpone making big purchases.

Retirement Planning’s Three Biggest Pitfalls


What is the number 1 retirement mistake?

Most Common Mistakes
Underestimating the impact of inflation
Underestimating how long you will live
Overestimating investment income
Investing too conservatively

What is the 3 rule in retirement?

The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule). However, 3% is now considered a better target due to inflation, lower portfolio yields, and longer lifespans.

What are the most common retirement planning mistakes?

If you can avoid financial pitfalls and other retirement planning mistakes, you’ll increase your chances of enjoying a comfortable retirement. Here are some of the most common retirement planning mistakes: Not getting an early start. Reducing your savings over time. Agreeing to support adult children. Overlooking contribution opportunities.

What are some common retirement savings mistakes?

Here are five common mistakes: 1. Waiting Or Failing To Participate Part of the retirement savings problem is simply participation, either not enrolling in your company plan or wasting valuable years before starting to contribute.

How can I avoid the worst retirement mistakes?

To avoid the worst retirement mistakes, you have to be realistic about your plans and think ahead. Unfortunately, it’s too easy to make the wrong financial moves when preparing for retirement. According to the Federal Reserve, 31% of non-retired adults believe their retirement savings are on track.

What should you avoid when preparing for retirement?

Sometimes, what to avoid is as important as what to embrace — and when it comes to retirement, there are several pitfalls to look out for. Here are five common mistakes: 1. Waiting Or Failing To Participate

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