Retirement Planning: Avoid These 6 Common Mistakes
Presented by Irvine based Financial Advisor JP Geisbauer,CPA, CFP®, of Centerpoint Financial Management.
The Retirement Plan You Can’t Afford to Skip: Avoid These 6 Common Mistakes
Imagine this: You’ve spent decades building your career, carefully saving for the day you can finally clock out for good and live the retirement you’ve always dreamed of. But a few years in, you notice your nest egg is shrinking faster than you anticipated. Anxiety starts to creep in as you wonder if your savings will last.
What’s going wrong?
Unfortunately, this scenario happens more often than you might think. Retirement planning is complex, and a few missteps can lead to significant financial strain. Let’s dive into six common retirement mistakes that could jeopardize your financial security—and, more importantly, how to avoid them. By addressing these pitfalls, you can create a robust retirement plan that ensures your money lasts as long as you do.
1. Underestimating How Long You’ll Live
One of the biggest mistakes retirees make is underestimating their lifespan, a phenomenon known as “longevity risk.” It’s easy to assume you’ll only need savings for 15 or 20 years, but the reality might be far longer.
According to the CDC, the average 65-year-old today can expect to live nearly 19 more years. And that’s just the average—plenty of people live well into their 90s. If you don’t plan for this possibility, you could outlive your savings and face difficult choices in your later years.
What to Do:
Use conservative estimates when calculating how long your savings need to last. Plan for at least 30 years of retirement.
Stay proactive about healthcare costs, as they tend to rise significantly in later years.
2. Mismanaging Social Security Benefits
Social Security is a cornerstone of retirement income, yet many retirees claim their benefits without fully understanding the long-term implications. Did you know that claiming Social Security at 62 permanently reduces your monthly benefits? Waiting until full retirement age or even delaying to age 70 can significantly increase your payouts—up to 8% per year past your full retirement age.
For married couples, the decision becomes even more crucial. Coordinating when each spouse claims benefits can maximize lifetime income and survivor benefits.
What to Do:
Run a Social Security optimization analysis to determine the best claiming strategy for your situation.
If you’re married, plan your claims as a couple to maximize combined benefits.
Be mindful of how Social Security income interacts with other retirement income sources, potentially affecting your tax situation.
3. Failing to Use a Tax-Efficient Withdrawal Strategy
Taxes don’t stop in retirement, and mismanaging withdrawals from your accounts can lead to an unnecessarily high tax burden. For example, Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s—which start at age 73 for most retirees—are taxed as ordinary income. These withdrawals could push you into a higher tax bracket, increasing your overall tax liability.
What to Do:
Consider converting traditional IRA funds to a Roth IRA during low-income years to reduce future tax burdens.
Develop a withdrawal strategy that minimizes taxes by tapping taxable accounts first, then tax-deferred accounts, and saving Roth accounts for last, if that’s what will work best for you.
Be cautious about triggering capital gains taxes when selling appreciated assets in taxable accounts.
4. Overspending in Early Retirement
The excitement of newfound freedom can lead many retirees to overspend in their first few years of retirement. Whether it’s traveling, picking up new hobbies, or indulging in luxuries, these expenses can quickly add up and derail your long-term financial plan.
What to Do:
Create a detailed retirement budget that separates essential expenses (housing, healthcare) from discretionary spending (travel, dining out).
Stick to a sustainable withdrawal rate—typically around 4% of your total portfolio annually.
Periodically review your spending to ensure it aligns with your plan.
5. Underestimating Inflation
Inflation is the silent thief of retirement savings. Over 20 or 30 years, even modest inflation can drastically reduce your purchasing power. For instance, with a 3% annual inflation rate, the cost of living doubles roughly every 24 years. This means your $1 million retirement fund might feel like $500,000 in terms of purchasing power.
What to Do:
Include inflation-adjusted projections in your retirement plan.
Consider Social Security’s cost-of-living adjustments (COLA) when timing your claims.
6. Improper Asset Allocation
Striking the right balance between risk and reward in your investment portfolio is critical. Too conservative, and your portfolio may not keep pace with inflation; too aggressive, and you risk significant losses during market downturns.
What to Do:
Work with a financial advisor to create a diversified portfolio tailored to your goals, risk tolerance, and time horizon.
Rebalance your portfolio annually to maintain your target allocation.
Don’t overlook the importance of having a cash reserve for unexpected expenses or market volatility.
Conclusion
Retirement planning isn’t just about saving money; it’s about managing it wisely to support your goals and lifestyle for decades. By avoiding these six common mistakes—underestimating longevity, mismanaging Social Security, failing to plan for taxes, overspending, underestimating inflation, and improper asset allocation—you can build a retirement plan that stands the test of time.
Remember, the best retirement plans are proactive, not reactive. Take the time now to review your strategy, make adjustments, and consult with a fiduciary financial advisor to ensure you’re on the right path. Your future self will thank you.
Ready to dive deeper into retirement planning? Check out our other resources and videos for more tips and strategies to help you retire with confidence.
About Our Presenter:
JP Geisbauer is a Certified Public Accountant, a Certified Financial Planner ®, and the founder of Centerpoint Financial Management, LLC, a financial planning, investment management, and income tax planning firm located in Irvine, CA. JP Geisbauer is dedicated to helping California-based business owners and executives transition into retirement. He has been quoted in many news outlets including Forbes, Newsweek, US News & World Report, MarketWatch, YahooFinance, CNN and NerdWallet.
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Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes individual financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, consult with your own financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.