What are the most common pitfalls to avoid when planning for retirement?

1 Start saving early

One of the biggest mistakes you can make is to postpone or neglect your retirement savings. The sooner you start saving, the more time you have to benefit from compound interest and grow your nest egg. Even if you can only save a small amount each month, it can make a significant difference in the long run. Try to take advantage of any employer-sponsored retirement plans, such as 401(k)s or IRAs, that offer tax benefits and matching contributions. You can also use online calculators or consult a financial planner to estimate how much you need to save based on your income, expenses, and retirement goals.

2 Diversify your portfolio

Another common pitfall is to put all your eggs in one basket when it comes to investing your retirement funds. If you rely too much on one asset class, such as stocks, bonds, or real estate, you expose yourself to more risk and volatility. A diversified portfolio can help you balance your risk and return, and protect you from market fluctuations and inflation. You can diversify your portfolio by investing in a mix of different asset classes, sectors, regions, and strategies. You can also adjust your asset allocation based on your age, risk tolerance, and time horizon. For example, as you approach retirement, you may want to shift some of your assets from stocks to bonds or cash to preserve your capital.

3 Plan for health care costs

Health care is one of the biggest expenses for retirees, and it can easily eat up a large portion of your retirement income. According to a study by Fidelity, the average 65-year-old couple retiring in 2020 will need about $295,000 to cover their health care costs in retirement, excluding long-term care. To avoid being caught off guard by these costs, you need to plan ahead and budget accordingly. You can consider various options, such as Medicare, Medigap, Medicare Advantage, or private health insurance, to cover your medical needs and expenses. You can also use a health savings account (HSA) to save and invest money for health care expenses on a tax-advantaged basis.

4 Avoid withdrawing too much

Once you retire, you need to be careful about how much you withdraw from your retirement accounts each year. If you withdraw too much, you may run out of money sooner than you expect. If you withdraw too little, you may miss out on enjoying your retirement lifestyle. A common rule of thumb is to withdraw 4% of your portfolio value in the first year of retirement, and adjust it annually for inflation. However, this rule may not work for everyone, as it depends on various factors, such as your life expectancy, investment returns, spending habits, and taxes. You may want to use a withdrawal rate calculator or consult a financial planner to find the optimal withdrawal rate for your situation.

5 Minimize your taxes

Taxes can have a significant impact on your retirement income, especially if you have multiple sources of income, such as pensions, Social Security, dividends, capital gains, or withdrawals from retirement accounts. Different types of income are taxed differently, and you may face different tax brackets and rates depending on your filing status, deductions, and credits. To minimize your tax burden, you need to plan ahead and use various strategies, such as choosing the right retirement accounts, timing your withdrawals, optimizing your Social Security benefits, and taking advantage of tax breaks and credits. You can also use a tax calculator or consult a tax professional to estimate your tax liability and plan accordingly.

6 Review your plan regularly

Finally, one of the most important tips to avoid retirement planning pitfalls is to review your plan regularly and make adjustments as needed. Your retirement plan is not a set-it-and-forget-it document, but a dynamic and evolving guide that reflects your changing goals, circumstances, and expectations. You should review your plan at least once a year, or whenever you experience a major life event, such as a marriage, divorce, death, birth, job change, or health issue. You should also monitor your portfolio performance, expenses, income, and taxes, and make changes if necessary. By reviewing your plan regularly, you can stay on track and achieve your retirement goals.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?