Common Mistakes to Avoid When Planning for Retirement

Personalized Retirement Planning | by Jules Buxbaum | Wednesday, January 08, 2025

Retirement planning mistakes can sabotage years of hard work and savings if they go unnoticed. Many professionals, business owners, and even finance teams fall into avoidable traps that reduce their retirement security.

If you’re worried about falling behind, explore ways to catch up on your retirement savings so you can move forward with confidence. Before you commit to a long-term plan, it’s helpful to understand where many people slip up—and how to steer clear of those pitfalls.

1. Overlooking the Importance of Starting Early

Failing to save at a young age is a frequent misstep. Early contributions harness compound growth, which puts your money to work for decades.

A study by the Employee Benefit Research Institute found that 40% of U.S. households risk running out of funds during retirement because they wait too long to begin saving. Starting even 10 years earlier can add tens of thousands of dollars to your future balance.

2. Underestimating Healthcare and Longevity

Medical expenses often climb in later years, yet many retirees fail to budget for them accurately. Vision, hearing, and dental costs may not be fully covered by programs like Medicare.

According to Fidelity’s 2024 estimate, a 65-year-old couple retiring now could face up to $315,000 in healthcare expenses throughout retirement. People are also living longer, with 46% of financial advisors citing greater-than-expected life spans as a major oversight in retirement planning.

3. Ignoring Inflation

Inflation silently reduces buying power. Over 20 years, an annual rate of just 2% can make $100,000 feel closer to $67,000.

A recent survey found that nearly half of financial planners consider underestimating the rise in costs one of the most common retirement pitfalls. Learn more about how rising prices can shrink your nest egg by reviewing inflation risk in retirement savings.

4. Being Overly Conservative or Overly Aggressive

Erring too far in either direction can damage long-term results. A high-risk approach may backfire just before you stop working, while an extremely cautious strategy may not generate enough growth.

Academic research on the Equity Risk Premium (ERP) shows that equities have delivered higher average returns than bonds and other fixed-income investments for over a century. Many individuals, however, do not take enough risk given their need for growth. A low-risk portfolio may be fine for someone who has substantial resources, but most people need the historically superior returns of stocks to fund a comfortable retirement.

5. Following a One-Size-Fits-All Glide Path

Traditional advice suggests lowering risk as you age by shifting into more conservative assets. Yet this rule of thumb is almost entirely unsupported by real data or robust economic theory.

Rather than automatically reducing equity exposure at a specific birthday, it’s wise to consider your future earnings relative to current wealth. A new professional in their 20s with minimal savings can handle more volatility because they still have many working years ahead. Meanwhile, someone older but with significant income potential might maintain a moderately higher equity allocation than a standard “glide path” would suggest.

Social Security remains a vital source of income for many retirees, but missing the optimal claiming age can be costly. Claiming the moment you hit 62 locks in lower monthly benefits permanently.

Delaying your claim until age 70 yields roughly an 8% boost for each year you wait after full retirement age. As an example, a 30% permanent reduction occurs if you claim at 62 versus the full retirement age—so carefully weigh how much you need immediate benefits against your long-term security.

7. Failing to Plan for Taxes

Forgetting about taxes in retirement can erode your savings more than you realize. Withdrawals from traditional IRAs and 401(k)s are taxed as regular income.

When you add Social Security benefits and potentially large required minimum distributions (starting at age 73), you might jump into a higher bracket. Without a strategy, you could owe more than expected, especially if you overlook future brackets when someone’s spouse files or passes away.

8. Withdrawing Without a Strategy

Pulling from retirement accounts haphazardly can deplete your investments faster and leave tax-saving opportunities on the table. The traditional “4% rule” is a decent starting benchmark, but it may not fit every situation.

Some retirees employ dynamic withdrawal rates or prioritize certain accounts first to shield themselves from market dips. By planning distribution phases, you protect principal and preserve income for later years.

9. Neglecting Estate and Legacy Plans

Estate documents, including wills and trusts, protect your family from legal gridlock. Yet many individuals forget to update beneficiary designations or never draft the necessary paperwork at all.

Outdated plans can also create tax pitfalls or produce unintended outcomes. If you want to leave a meaningful financial legacy, outline your wishes through vital legal tools so heirs avoid confusion when the time comes.

10. Overlooking Customized Risk Allocation

Two people of the same age can have drastically different risk profiles based on their total wealth and future earnings. A simplistic model that ties risk strictly to age can be misleading.

At 2Pi Financial, we believe asset allocation is driven partly by each client’s balance of current assets and expected future income. We don’t claim lowering risk with age is always wrong, but we encourage a thoughtful assessment of all factors that might help or hurt your nest egg.

How 2Pi Financial’s Planning Engine Helps

Our AI-driven platform bridges the gap between the retirement a professional might envision and the practical steps needed to achieve it. We tailor advice by analyzing personal variables such as risk tolerance, current savings, and even potential mid-career changes.

To see how your numbers might play out, explore our in-depth Two Pi Financial Planner. It helps you input financial details, tweak factors like retirement age, and model withdrawal rates. You’ll gain clarity on the probability of success and discover adjustments you can make for a more comfortable future.

Bottom Line

Avoiding retirement planning blunders means being mindful of factors like inflation, healthcare, taxes, longevity, and future earnings potential. One person’s perfect plan can be the next person’s worst-case scenario, which is why a tailored approach can set you up for success.

For insight into adapting to changing market conditions and life events, discover ways to shift your retirement strategy when the market changes. By anticipating pitfalls, you’ll create a more resilient plan that carries you through every phase.

References

1. Employee Benefit Research Institute. (2023). “Retirement Savings Shortfalls.” Available at: https://www.ebri.org(#)

2. Fidelity. (2024). “Annual Retirement Health Care Cost Estimate.” Available at: https://www.fidelity.com(#)

3. Morgan Stanley. (2023). “Retirement Planning Mistakes.” Available at: https://www.morganstanley.com(#)

4. Social Security Administration. (2024). “When to Start Receiving Retirement Benefits.” Available at: https://www.ssa.gov(#)