How to Avoid These 10 Retirement Planning Mistakes

Nearly half of Americans risk not having enough savings to maintain their lifestyle in retirement.

According to the Employee Benefit Research Institute, 40% of U.S. households may run short on retirement funds. The real problem? Avoidable mistakes. Procrastination, missed opportunities and inaction leave many underprepared.

Here’s how to avoid the 10 most common retirement planning mistakes.

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Mistake No. 1: Relying on a single source of retirement income

Many people assume that Social Security or one 401(k) will be enough. But relying solely on one source is risky if that source underperforms or if Social Security benefits cover less than expected.

How to avoid it: Diversify. Multiple income sources provide security and flexibility. For example, portfolios with PensionBee, of which I am the founder and CEO, automatically diversify across various ETFs managed by State Street Global Advisors, spreading savings across different assets. Consider health savings accounts (HSAs) and other taxable investments as well.

Mistake No. 2: Not planning for health care costs

Health care is one of the biggest retirement expenses, and it’s often underestimated. Medicare doesn’t cover all health care needs, leaving many retirees unprepared for substantial out-of-pocket costs.

How to avoid it: Explore HSAs if eligible and review Medicare and long-term care insurance options to prepare for future expenses. For example, Fidelity’s 2024 annual Retirement Health Care Cost Estimate says health care costs for a 65-year-old retiring this year could reach up to $165,000 with premiums, out-of-pocket expenses and other common health care costs not covered by Medicare.

Mistake No. 3: Delaying contributions

Putting off saving for even a few years means missing out on years of compound growth, which can be costly in the long run.

How to avoid it: Start early, even with small contributions. For example, saving $200 per month at age 25 rather than 35 could mean an additional $100,000 in retirement savings due to compounding with an average return rate of 6%. Automate savings to make it a habit.

Mistake No. 4: Not adjusting for inflation

Planning based on today’s dollar value, without adjusting for inflation, can lead to an underfunded retirement. As prices rise, a fixed income may lose purchasing power.

How to avoid it: Use retirement calculators that factor in inflation. Also, invest in diversified assets with growth potential to keep pace with rising costs. The difference could be substantial — historical inflation rates indicate a 3% annual increase, which can significantly erode a fixed income over 20 to 30 years.

Mistake No. 5: Ignoring the impact of fees

Many investors don’t realize how fees can drastically reduce retirement savings over time. Fees compound over the years, eroding investment gains and significantly reducing your nest egg.

How to avoid it: Review investment fees regularly. For example, an average 401(k) balance of $100,000 with a 1% annual fee could cost $30,000 over 20 years. Consider low-fee index funds and passive investments. Also be sure to use online fee calculators to understand the long-term impact on your savings.

Mistake No. 6: Making early or unplanned withdrawals

Taking money from your retirement accounts early can have significant consequences, reducing future retirement income. Plus, it could result in a 10% penalty and income tax owed on the amount withdrawn.

How to avoid it: Establish an emergency fund outside of your retirement savings to reduce the temptation of early withdrawals. When needed, use a strategy like the 4% rule — keeping withdrawals under 4% annually — to extend savings.

Mistake No. 7: Overlooking tax optimization

Ignoring tax strategy can leave retirees with unexpected tax bills that cut into their income. Failing to plan withdrawals could lead to higher taxes or Medicare premium increases. For example: Medicare premiums rise when modified adjusted gross income (MAGI) exceeds $97,000 (single) or $194,000 (married).

How to avoid it:

• Stay in a lower tax bracket by withdrawing strategically. Spread income across years to minimize tax impacts. A $10,000 withdrawal spread over two years instead of one could help you stay in a lower income tax bracket.
• Offset higher deductions with income. In years with large deductible expenses, like high medical bills or education costs, consider increasing withdrawals to maximize deductions and minimize tax impact.
• Take required minimum distributions promptly. If you wait until after age 73 to take RMDs, you will incur a 25% penalty on the amount not withdrawn — so be sure you are taking your withdrawals on time.
• Use Roth IRAs to access tax-free income when available, which can also avoid triggering Medicare premium increases.

Mistake No. 8: Leaving money (and employer matches) on the table

Every time you start a new job, you should be sure that you are contributing enough to your employer’s retirement plan. You may have a new salary and should remain mindful to match or increase your previous contributions. Additionally, not contributing enough to meet the full employer match is essentially leaving free money on the table. For instance, not contributing enough to get a 4% employer match on a $60,000 salary could mean losing $2,400 annually.

How to avoid it: Contribute enough to capture the full match to benefit from compounding growth. Use contribution-tracking tools to ensure you’re maximizing matches.

Mistake No. 9: Underestimating life expectancy

Many people assume they won’t live as long as current life expectancy trends suggest. Planning for a shorter retirement could mean outliving your savings, especially if your expenses rise in later years due to health care needs.

How to avoid it: Plan for a 30-year retirement. Look into income sources that last a lifetime, like annuities or maximize Social Security benefits by delaying claiming them until age 70 if possible.

Mistake No. 10: Not updating your retirement plan with life changes

Major life events — such as marriage, divorce, job changes or health shifts — can significantly alter retirement needs and goals. Yet many overlook the importance of revisiting and adjusting their plan accordingly.

How to avoid it: Review your retirement plan every three to five years or after major life changes. Update beneficiaries, adjust savings and reassess investments as needed.

Avoiding these common mistakes can make a significant difference in your retirement comfort. By taking a proactive role — reviewing and adjusting your retirement plan annually — you’ll be better prepared for a secure future. Remember, small actions today lead to big rewards in the years to come.

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