12 Costly Retirement Mistakes to Avoid

Most of us look forward to retirement, imagining that we'll get to relax more and do lots of things that we haven't had sufficient time for -- such as traveling, reading, and exercising. How pleasant and secure our retirements are depends to a great deal on how well we prepare -- and on how many smart moves and how few mistakes we make.

It's very risky to leave much of your retirement to chance, as that increases your odds of running out of money long before you run out of breath. For best results, be the master of your own retirement and make savvy decisions.

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Here are 12 common -- and costly -- retirement mistakes to avoid:

1. Not having a plan

The most basic mistake that millions make is simply not having a plan. According to the 2017 Retirement Confidence Survey, only 41% of respondents said that they or their spouse has taken the time to estimate how much money they'll need in retirement.

There's no one-size-fits-all number regarding how much you need to save for retirement, but some experts suggest aiming for 80% of your income at the time you retire. So if you retire earning $75,000, you'll want to aim to have  $60,000 per year. That would be your total needed income. Some of it will likely be Social Security benefits, and much will probably come from your savings. One way to help you figure out how much you need to save is to invert the 4% rule and multiply your desired annual income from your nest egg by 25. (The 4% rule is a very rough guide to how much money you can withdraw from your nest egg in retirement in order to make it last.) So, for example, if you want to be able to draw $25,000 from your nest egg in your first year of retirement, you'd multiply that by 25, getting $625,000. You'd need to retire with $625,000 saved.

Once you know how much your retirement will require, you'll need to figure out how you'll amass that sum. You might need to increase your saving, cut back on your spending, and/or take on a part-time job for a while.

2. Not making the most of tax-advantaged retirement accounts

Another error is not taking advantage of retirement accounts available to you, such as traditional and Roth IRAs and traditional and Roth 401(k) plans at work. With a traditional IRA, you contribute pre-tax money, reducing your taxable income for the year, and thereby reducing your taxes, too. (Taxable income of $75,000 and a $5,000 contribution? Your taxable income drops to $70,000 for the year.) The money grows in your account, and when you withdraw it in retirement, it's taxed at your ordinary income tax rate at the time -- which is often lower than your current rate.

With a Roth IRA, you contribute post-tax money that doesn't reduce your taxable income at all in the contribution year. (Taxable income of $75,000 and a $5,000 contribution? Your taxable income remains $75,000 for the year.) Here's why the Roth IRA is a big deal, though: Your money grows in the account until you withdraw it in retirement -- tax free. For 2018, the IRA contribution limit is $5,500 -- plus $1,000 for those 50 or older.

Meanwhile, 401(k)s also come in traditional and Roth varieties, and their 2018 contribution limits are far steeper -- $18,500 plus an additional $6,000 for those 50 and up. The table below shows how much you can accumulate by socking away various sums that grow at an annual average of 8%. Remember that if you do so within a Roth IRA and/or a Roth 401(k), the sums below may be yours tax-free. If you're in a 25% tax bracket and empty a Roth account worth $500,000, you can avoid paying $125,000 in taxes.

Calculations by author.

No matter what sum you need, the sooner you start saving and investing, the better off you'll be -- even if you're only in your 30s. After all, the younger you are, the longer your money can grow for you.

3. Cashing out 401(k) accounts

These days, it's common for workers to change jobs every few years, meaning that they end up contributing to lots of 401(k) accounts over time. It's also very common for workers to cash out those accounts when changing jobs. Don't do so, though. Early withdrawals result in 10% penalties -- plus taxation on the income. Even worse, you're shortchanging your future when you cash out your 401(k) -- and even, to a lesser degree, if you borrow from it, leaving many dollars unable to grow for you for a number of years.

Even if your 401(k) has only $20,000 in it when you leave your job, if that sum can keep growing for another 20 years and it averages an annual growth rate of 8%, it will grow to more than $90,000, which can be very meaningful in retirement.

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4. Putting off saving for retirement

Most of us procrastinate with various tasks we need to do -- but putting off preparing for your retirement is a very costly kind of procrastination. To understand just how costly, imagine that you plan to sock away $8,000 per year for 20 years, in order to fund your retirement, and you expect to earn an average annual return of 8%. What happens if you put it off and start this investing in earnest two years late? Well, if you sock away $8,000 annually for 18 years and it grows by 8% annually, you'll end up with around $323,570. What if you didn't procrastinate and followed your plan for a full 20 years? Well, then you'd end up with $395,383 -- more than $70,000 more. Note, too, that you end up with more than 70,000 extra dollars just by having made two extra $8,000 investments, or $16,000. The earliest dollars you invest have the most time to grow. By putting off saving aggressively for retirement, you're leaving many thousands of dollars on the table.

The table below offers more examples of how a few years can make a big difference. For example, consider that if you socked away $10,000 annually for 25 years, it would grow to almost $790,000 over 25 years. If you'd started five years late, though, you'd have accumulated about $500,000 over 20 years -- that's almost $300,000 less.

Calculations by author.

5. Assuming Social Security will be enough

Another error is assuming that the Social Security benefits you'll receive in retirement will be enough (or close to enough) to support you. In many instances, that's just not the case. Consider this: The average Social Security retirement benefit was recently $1,411 per month, or only about $17,000 per year. Of course, if you earned more than average during your working years, you'll collect more than that -- but not necessarily a lot more. The maximum benefit for those retiring at their full retirement age was recently $2,788 per month -- or about $33,000 for the whole year.

Savvy planners will find out what they can expect from Social Security and will incorporate it into their plans. You can get an estimate of your expected benefits from the Social Security website at www.ssa.gov.

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6. Underestimating healthcare costs

We all know that healthcare is extremely costly, but we don't always remember to include it in our retirement planning. The 2018 Retirement Confidence Survey found that only 19% of workers have taken the time to estimate how much money they will need for healthcare expenses in retirement. There's no way to really know exactly how much you'll need, but it does help to have a rough idea. So consider this: A 65-year-old couple retiring today will spend, on average, a total of $275,000 out of pocket on healthcare, according to Fidelity Investments. (That doesn't include long-term care expenses, either.)

One way to ease this burden is to be smart about Medicare, choosing the plan that will serve you best and making the most of all the program offers. Be good about getting screenings and preventive care, for example, and you might reduce your overall healthcare costs by staying healthier. Long-term care insurance is worth considering, but it's imperfect and is quite costly itself, the older you are when you sign up for it.

Overall, you might aim to afford healthcare by planning to save more aggressively and aiming for a bigger nest egg. Or delay starting to collect Social Security in order to end up with fatter benefit checks. Other possible options for some include reverse mortgages or tapping life insurance policies for extra income, though that comes at the expense of heirs.

7. Underestimating how long your retirement will be

The most common age at which Americans retire is about 62 or 63. There are lots of reasons why it's good to retire as early as you can -- but it can be a dangerous gambit, too, if you end up living a very long life.

It's estimated that America is home to about 72,000 centenarians -- people aged 100 or older. If you live to 100 and retire at age 62, you're looking at 38 years of retirement. If you only live to 90, that's still a significant 28 years that your dollars will need to last. According to the Social Security Administration, "About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95."

Because of the possibility of living a long life, personal finance guru Suze Orman has advised that most people should aim to retire no earlier than age 70: "Every dollar you don't spend in your 60s is a dollar that can keep growing for your 70s and beyond." (For some people, this advice is sound. If you have planned well, though, and have socked away enough money for retirement, you could retire much earlier.)

8. Retirement will deliver some surprises

You might end up retiring earlier than you planned to. According to the 2016 Retirement Confidence Survey, 46% of retirees left the workforce earlier than planned, with 55% citing health problems or a disability as the reason and 24% citing changes at work such as a downsizing or workplace closure.

Image source: Getty Images.

9. Not considering fixed annuities

It's smart to at least consider investing in one or more annuities for your retirement, as it can provide almost guaranteed regular income, like a pension, and it can do so for the rest of your live, reducing the chance that you'll not have enough money to live on in later years.

Stick with fixed annuities, though, as opposed to variable or indexed annuities. (Those can be problematic, with steep fees and restrictive terms.) Here's the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment:

Data source: immediateannuities.com.

Another strategy to avoid running out of money is investing in a deferred fixed annuity (sometimes called longevity insurance). Instead of starting to pay immediately, it starts paying at a future point, such as when you turn a certain age. For example, a 70-year-old man might spend $50,000 for an annuity that will start paying him $933 per month for the rest of his life beginning at age 80.

10. Being late to sign up for Medicare

Medicare is critically important for tens of millions of retirees, and it will likely be critical for you, too. Just don't be late enrolling in Medicare, or you'll pay -- a lot. Your Part B premiums (which cover medical services but not hospital services) can rise by 10% for each year that you were eligible for Medicare and didn't enroll. Yikes!

So when, exactly, should you enroll? Well, you're eligible for Medicare at age 65, and you can sign up anytime within the three months leading up to your 65th birthday, during the month of your birthday, or within the three months that follow. Those seven months are your initial enrollment period.

The thought of missing that period may be worrisome, but there's a helpful loophole: If you're among the many Americans who are already receiving Social Security benefits by the time they reach age 65, you should be enrolled in Medicare automatically. You might also avoid the late-enrollment penalty and be able to skip the deadline if you're still working (with employer-provided healthcare coverage) at age 65, or if you're serving as a volunteer abroad.

11. Ignoring inflation

Warren Buffett has said, "The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature." He explained that while an income tax taxes earnings, inflation is applied to everything. So while you might earn 4% interest on a bank account in some years, if inflation is 4%, it will wipe out that gain entirely.

Over long periods, inflation has averaged about 3% per year, but in any given year or period, it can be much higher or lower. In 2015, for example, it averaged close to 0%, while it was 6% in 1982, 9% in 1975, and more than 13% in 1980. Even at 3%, it can really shrink the purchasing power of your future dollars, as something that costs $1,000 now may cost about $1,810 in 20 years.

Imagine that you're aiming to amass $875,000 by the time you retire in 20 years, figuring that that sum will be enough to support you. Well, if inflation averages 3%, that $875,000 will end up having the purchasing power of just $484,000 in today's dollars. You'd need to amass about $1.6 million by retirement in order to end up with the purchasing power of $875,000 today. Keep inflation in mind when planning for retirement -- and perhaps ratchet up your savings goal and your annual contributions. (Know, too, that there are a bunch of ways to increase your retirement income.)

12. Not being strategic about Social Security

Finally, don't just start collecting your Social Security benefits at any old time. Learn more about it first, because there are ways to maximize your Social Security and some strategies you might employ -- especially if you're married.

For example, you can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age, which is 66 or 67 for most of us these days. A married couple can coordinate their benefit-taking, perhaps having the spouse with the lower expected benefits starting to collect early, so that the other spouse can delay starting to collect, allowing those eventual benefits to grow bigger.

Spend a little time learning more about retirement and smart moves to make, and you can end up with thousands, tens of thousands, or even hundreds of thousands of dollars more than you expected. That can make a huge difference in your last decades of life.