24 Mistakes Americans Wanting To Retire Make and Regret
The retirement age for Americans depends on who you ask. Some say it’s 62, which is when you can start collecting Social Security benefits. Others go by the Internal Revenue Service (IRS) guidelines: 65 years old for people born before 1960 and 67 for those born after.
Regardless of the age you plan on retiring, this much is true for too many Americans: A comfortable retirement is out of reach due to poor planning.
Mindfully American gathered some of the most common pre-retirement mistakes Americans make. Some of these mistakes have exceptions to the rule, while others are true across the board.
1: Not Saving Enough
Numbers don’t lie: Not saving enough money for retirement is one of the most common mistakes Americans make. The Motley Fool reported that in 2023, people between the ages of 55 and 64 only had $185,000 in their retirement accounts. Those 65 to 74 years old had $200,000.
The issue? Investment giant Fidelity recommends that people have 10 times their salary saved by the time they reach 67 years old.
Let’s assume that you were earning $50,000 by the time you reached 67 years old. Based on Fidelity’s recommended numbers, you should have a minimum of $500,000 saved. Of course, this multiple varies depending on the age you plan on retiring and the lifestyle you want to have during your golden years.
2: Retiring Too Early
Retiring early is possible, but having extra savings is vital. One of the biggest challenges for people who retire early is that Medicare doesn’t start until 65 years of age.
Therefore, early retirees must cover the costs of their own healthcare, and it can get expensive. On top of that, you might find that you’re paying more for healthcare than you did at your workplace while receiving fewer healthcare benefits.
3: Forgetting About Taxes
Just because you no longer work doesn’t mean you won’t pay taxes during retirement. Any income you have, including from taxable retirement accounts, is fair game for paying taxes in the IRS’ eyes.
That said, the federal government offers lower tax rates to Americans 65 years and older who meet certain qualifications.
Furthermore, some states don’t have income tax regardless of a person’s age, while others offer tax relief for people of retirement age. Florida, Texas, Alaska, and South Dakota are examples of states without income tax; Illinois, Iowa, Mississippi, and Pennsylvania don’t tax retirement income.
4: Shopping Until You Drop
Experts recommend Americans save at least 15% of their pre-tax income each year, including employer matches. People who wait until 30 years old should put away 18% of their pre-tax income for retirement, and those who start at 35 should save 23%.
Unfortunately, many Americans don’t save nearly this much each month for retirement. Instead, at best, spending money on (often unnecessary) items cuts into the amount of money that could be working for them in investments. At worst, they accumulate interest-heavy debt in the process.
5: Underestimating Longevity
No matter how old or young your intuition thinks you’ll live, far too many Americans underestimate their lifespan.
As of 2021, 89,739 Americans were 100 years or older. That’s almost twice as many as twenty years prior.
Although, statistically, your chances of living until 100 or beyond are slim, you sure as heck don’t want to reach the milestone of being a centenarian and having $0 in your retirement account.
6: Taking Social Security Too Early
Taking Social Security at 62 years old is tempting. And in some situations, early withdrawal makes sense.
However, by receiving Social Security before you reach 66 or 67 years old (according to the year you were born), you’ll receive a permanently reduced payout amount. So, how does that look in real life?
Let’s say you were born in the 1960s or later. If you start taking Social Security at 62 instead of 67, you’d receive 30% less money each month. Furthermore, you’d miss out on the benefits of compounding growth when the government increases rates.
7: Not Accounting for Inflation
Tucking money away in a savings account doesn’t cut it when it comes to preparing for retirement. That’s because many savings accounts don’t outpace inflation, meaning your retirement money will lose value over time. For this reason, investing in IRA and 401(k)-like retirement accounts is vital.
Another mistake retiree wannabes make is believing that their pension will hold the same value in the decades to come after they retire. Some pensions don’t adjust for inflation and those that do often don’t adjust sufficiently for it.
8: Failing To Plan for Medicare
Not applying for Medicare during the allotted time frame could result in you paying a late enrollment fee. All eligible seniors, regardless of whether or not they’re still working, may apply for Medicare starting three months before they turn 65 and three months after they turn 65.
If you miss the 7-month initial Medicare enrollment period, you may sign up during the annual January 1st to March 31st enrollment time frame.
That said, there are exceptions to these rules, so read through Medicare’s website or consult with a professional to better understand the qualifications.
9: Underestimating Healthcare Costs
You don’t need us to tell you that healthcare in the U.S. is expensive. Medicare covers many healthcare costs, but it doesn’t cover all of them. You’ll be responsible for premiums, deductibles, copayments, and coinsurance.
In 2021 alone, approximately 20% of Medicare-aged seniors paid an average of more than $2,000 for healthcare expenses.
For this reason, many experts recommend retirees purchase supplemental insurance. This insurance will help pick up the gaps in coverage and reduce out-of-pocket expenses once you reach Medicare age.
10: Retiring With Debt
The Center for Retirement Research at Boston College found that debt has been increasing in U.S. households over the age of 65. In the late 1980s, 38% of American households over 65 carried debt. In 2023, the number had risen to 63%.
What’s even more worrying is that much of the debt growth is due to high-risk borrowing, with many seniors teetering on the edge of being overleveraged.
If you’re in debt and nearing retirement age, downsizing your home and putting any extra money towards your debt may be one option to help you reduce or eliminate your monthly debt bills.
11: Cashing Out a Pension
People preparing for retirement who have a pension are often faced with two choices: Take a lump-sum distribution or receive lifetime monthly payments.
According to studies, lifetime monthly payments are the way to go.
Over the course of five years, people who receive monthly pension payments are more likely to maintain the same levels of financial stability than those who received a lump-sum cash payment.
12: Underestimating Monthly Budget
A recent study shows a troubling trend that Americans preparing for retirement often underestimate how much they think they’ll spend each month.
Of the 1,000 Americans Nationwide Retirement Institute surveyed between the ages of 60 and 65, 42% of those still working estimated they would spend 42% of their monthly retirement income on living expenses. However, those who were retired said they spent 53% of their budget on expenses like housing and food.
Under budgeting can risk the quality of your retirement. Approximately one in three retired Americans are planning or thinking about getting a job in large part because they worry they’ll run out of money.
13: Too Many Risky Investments
Yes, riskier investments often have the potential to be more lucrative than investing in something like an S&P 500 exchange-traded fund (ETF). However, it’s a bad idea for people nearing retirement to have a high-risk investment portfolio.
According to investing firm Charles Schwab, it’s reasonable for someone with 30 years left until they retire to have a relatively higher volatility portfolio. However, as the same person nears retirement age, moving away from volatile stocks is wise.
14: Reacting to the Market
In contrast to taking too many risky investments, some people preparing for retirement during a recession or bear market might be tempted to sell any stocks they have in the name of salvaging some of their money.
It’s best to speak with a financial professional in this situation, for a variety of factors go into determining whether selling is the right fit for a retiree-to-be.
15: Forgoing Full Employer Match
No matter how late of a start you get on taking advantage of the 401(k) match your employer may offer, anytime is better than no time.
For example, if your employer offers a dollar-for-dollar 401(k) match up to 3% of your income, assuming you make $60,000 per year and also contribute 3%, you’d have $3,600 in annual contributions instead of $1,800.
16: Not Seeking Professional Advice
Consulting with a financial advisor to help you with your retirement plan as you near the age you want to retire can be an excellent way to check if you’re in good enough shape to take the financial plunge.
Financial advisors can also help you get on track with the last leg of your retirement savings and offer advice on how to manage your money once you no longer work.
That said, not all financial advisors are truly qualified to support people as they near their retirement years, and their fee structure can be brutal. So, do your due diligence before choosing one.
17: Never Rebalancing Investment Portfolio
Rebalancing your retirement portfolio isn’t something you should only do as you’re getting ready to retire; doing so throughout your investment years is vital to help reduce volatility and manage risk.
It’s common for people to rebalance their portfolios when there’s market volatility, as this often changes one’s preferred risk profile.
If the thought of rebalancing your investment portfolio makes you queasy, seek help from an expert who can do it for you.
18: Early Withdrawal From Retirement Accounts
When one is nearing retirement, they should be doing everything in their power to increase their retirement funds, not withdraw from them.
Although there are a handful of exceptions, generally speaking, you’ll need to pay the IRS a 10% early withdrawal penalty on top of paying federal and state income taxes. So, while it may be tempting to use some of your nest egg to pay off your mortgage before you retire, in many cases, it’s not worth it.
19: No Emergency Fund
You’ve likely heard about the importance of having an emergency fund during your working years. However, some retirees-to-be mistakenly think that their retirement savings will take over as their emergency fund.
A commonly recommended rule of thumb is to withdraw 4% of your retirement savings each year. Doing so can help fund a 30-year retirement.
However, if you don’t have cash in an emergency fund when an unexpected expense arises, you’ll have to pull from your retirement account. Not only does that decrease the amount of growth the money you withdraw could have had, but it’s also an added punch if you withdraw during a recession or bear market.
20: Planning Retirement Around the Market
Taxes and not living forever may be the traditional certainties in life, but here’s another: Not being able to time the market.
Retiring during a recession or bear market is scary. But if you’ve been putting money into retirement since day one of working and you’ve worked out a sustainable retirement plan with a finance professional, it usually isn’t necessary to hold off on retiring due to poor market conditions.
Statistically, you’ll encounter several bear markets during your retirement. According to Kiplinger, a bear market has occurred about once every four years and eight months since 1932.
21: Overestimating Investment Income
Finance radio personality Dave Ramsey has advised that a 12% return rate on retirement investments is reasonable. However, other finance experts caution that this is an overestimation, and calculating such overestimations can lead to devastating results for retirees.
David Blanchett, the managing director and head of retirement research at PGIM DC Solutions, recommends people saving for retirement assume a return rate of 5%. If they have more aggressive stock exposure, a 7% return is a conservative estimate.
While you should ultimately work with a financial advisor to determine the average rate of return that you might be able to expect on your retirement investments, lowballing the number can help prevent you from running out of money during retirement.
22: Underestimating Home Costs
Paying off your mortgage before you retire is a huge step toward reducing your home-related expenses during retirement. Nevertheless, home costs don’t suddenly come to a halt.
Washing machines break, roofs need repair, and flooding can happen. All of these costs can throw off an otherwise well-thought-out retirement plan. Always keep your emergency fund in mind, and work on rebuilding it whenever you use it as you receive your retirement income.
23: Forgoing Catch-Up Provisions
Even if you’re not behind in saving for retirement, the last push of your working years isn’t the time to slack off on savings.
Once you reach 50 years old, the IRS allows Americans to contribute an additional $1,000 to your Traditional or Roth IRA. Similarly, increased contributions are available for 401(k)s and SIMPLE 401(k)s.
24: Working Too Long
It may sound counterintuitive, but working too long is a mistake that some retiree wannabes make.
Switching from saving for retirement to putting in your notice and spending your retirement savings can be scary. However, if you’ve saved well during your career and got the okay from your financial advisor, working longer than you need reduces the time you have to enjoy being retired.
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