3 Common Retirement Pitfalls (and How to Avoid Them)

by Emily Guy Birken · 7 comments

No matter where you are in your career, retirement is likely to be on your mind. Since this generation of workers can no longer expect employers to provide a generous pension and health insurance coverage, it can feel like all retirement decisions are up to us as individuals.

Add in the fact that there are a number of ways that retirement planning can go off the rails – and not all of those ways are within an investor’s control – and it’s clear that we have good reasons to be worried about retirement.

Fortunately, several of the most common retirement mistakes and pitfalls are avoidable. Here are three ways many people have undermined their own retirement, and what you can learn from their mistakes:

1. Relying on Factors That You Can’t Control

Finance guru Dave Ramsey has come under fire before because of his retirement investment advice. Ramsey, who offers very sound counsel on how to become debt-free, also suggests that the average investor can count on 12% returns on their investment.

Unfortunately, even if 12% returns were historically accurate (generally, the market averages about a 10% return over time), that kind of advice is a good way to find yourself retired with not enough money. As any financial adviser worth their salt will tell you, past returns are no guarantee of future results. Counting on the market’s ability to grow your money by a certain percentage means you’re relying on something over which you have absolutely no control.

What to Do Instead

Remember that you have complete control over two things: how much you save for retirement and how much you spend (both during retirement and beforehand). So base your retirement plan on realistic numbers, including how much you can save and how much you can adapt to market downturns.

If your retirement plan will only work if you earn a certain percentage through your investments, it’s time to go back to the drawing board and figure out how you can either save more or spend less.

2. Taking Social Security Too Soon

Social Security benefits start at age 62, and for anyone longing for the start of retirement, it can be a huge temptation to start taking benefits as soon as they’re available. But just because you can sign up for Social Security at age 62 doesn’t mean you should.

Delaying your benefits until you reach full retirement age means you’ll receive the full benefits available to you. Taking early benefits will cost you about 25% – the difference between $1,600 per month and $2,000 per month. Add in the fact that your annual cost-of-living adjustment is based upon your initial benefit, and it’s clear that taking Social Security too soon can seriously hurt your retirement finances.

What to Do Instead

The easy answer is to wait until you’ve reached your full retirement age (or even later) before you start taking benefits. The Social Security Administration offers a retirement estimator to help you figure out the best time to take your benefits.

However, even if you did elect to take early benefits, there’s still recourse. You have the option of paying back up to one year’s worth of Social Security benefits and then delaying your benefits until you reach your full retirement age. So if you started taking benefits last year when you reached age 62 and have since changed your mind, you do have the option of paying Uncle Sam back the money you received and wiping your slate clean – with no penalties.

3. Underestimating Your Health-Care Expenses

Health-care costs are not the sort of thing that most of us like to think about (or budget for), particularly when planning for retirement. It’s much more fun to daydream about days spent on the golf course or traveling the country. And isn’t that what Medicare is for, after all?

Not exactly. Many people may not realize that Medicare requires both premiums and co-pays and it doesn’t cover every medical or health-related service you might need. That means you’ll need to plan on using some of your nest egg to pay for healthcare, which, depending on what you need, could seriously derail your retirement.

What to Do Instead

While the bite of healthcare costs won’t go down if you ignore them, there are a couple of things you can do to mitigate them.

First, look into putting money aside in a Health Savings Account (HSA). If your employer offers one, this can be a great way to stash away tax-deductible money for future healthcare costs. It works like a 401(k) in many ways; you can put money aside that grows tax-deferred until you pull it out for qualified healthcare expenses. The only caveat is that in order to take advantage of an HSA, you must be enrolled in a high-deductible healthcare plan.

Second, long-term care insurance can be a good way to protect your nest egg should you need help with daily activities, but not be ill enough to need hospital care. Long-term care insurance is cheaper the earlier you buy it, so look into it before you plan to retire.

Have you fallen victim to any of these retirement pitfalls? How’d you recover?

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{ read the comments below or add one }

  • Boomer says:

    Dave Ramsey is the male version of Suze Orman. As you said, good on debt free advice such as avoiding the expensive lattes if you have trouble paying bills, and paying off high interest debt first (which should be common sense). Advice the investment savvy learned a long time ago. They cater to the unsophisticated and there are plenty of them. Other than that they give dangerous advice. But they get rich doing it, and their credentials are never questioned, for some reason.

    Regarding long term care, I’ve been reading lately that many companies are getting out of the business. Those that are not are dramatically raising their premiums to cover unplanned for costs and poor calculation of those costs many years ago. So, simply buying LTC at a younger age is no guarantee that your future cost will not rise dramatically.

    It is not like term life insurance where you lock in your premiums. Insurance companies can raise the rates when they need or want to. If you buy at a young age, one risk is that you pay premiums for so many more years, and you end up paying the same high premium as someone who just bought theirs at an older age. One advantage of buying young is that you have coverage before you get an illness that may preclude you. But that is still a smaller percentage or probability of occurrence anyway.

  • James says:

    I have seen a few articles on the subject. Why is so difficult to retirees or future retirees to calculate how much they can withdraw in retirement and be safe? When i retired in January i knew how much i had(everybody should know right?) on my TSP and how much i wanted to withdraw on a monthly basis to keep that money coming into my early 90’s.
    I used the calculators on the TSP website and i only used a conservative gain of 2% gain annually. With all those figures, am done. And i am sure i will do even better because the 2% gain is very low but, to be on the safe side.

  • Bill says:

    Social Security is a complicated program and needs to be explained in detail to everyone as they approach the age of eligibility by someone who knows the system. Spousal benefits also increase by delaying benefits to full retirement age, but not longer. Monthly benefits can increase by delaying retirement to age 70, but total benefits depend on how long you live. If you retire at 62 and collect benefits to death at age 72, you will have ten years of reduced monthly benefits. If you retire at age 70 and die at 72, you will have two years at maximum monthly benefits. If you live to 92, it’s a different scenario. You have to look at the various scenarios and try to maximize the lifetime benefits, not an easy task. I have less than one month before I become eligible for Social Security benefits, but I am employed full time and don’t plan to retire for the foreseeable future. That doesn’t mean that I will be able to delay retirement until age 66 or later. If my job disappears, I may not be able to find a decent job. If that happens, what do I do? Try to hold out until age 66 and scrape by or give in and accept retirement. I have invested and am in a much better position than many and have never used Social Security as part of my retirement plans, but there is so much uncertainty that I have to consider how to best utilize Social Security.

  • Paul says:

    Excellent point to #1. We can’t predict our investment but we do have total control. Another thing to look for is if fees are competitive and tax deductable. Thanks for the great tips to avoid.

  • Property Marbella says:

    Or do what many Scandinavians do to save money, move to a warmer and cheaper countries such as Spain and Portugal with the same benefits and hospitals in Scandinavia, but at a much lower cost of living and feel good.

  • MB says:

    The last point is a big one, considering the changes that are happening with the laws. Some of my self-employed friends (especially) are not looking forward to what health insurance will cost them. They’ll be able to get it, all right, but not at any reasonable price.

    There’s a lot to be said for exercising and eating right. Not only will you stand a better chance of living longer, you’ll pay out less to the doctors.

  • Nancy S Jordan says:

    Advocating long term health insurance concerns me. My 87 year old mother has been paying into this for over 20 years and her premiums have gone up to $370 a month. And apparently the “long term” is only for four years , after every other option has kicked in. If she never uses it, all that money is gone. Her explanation is “it gives me peace of mind” which sounds like something the salesman drilled into her.

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