Retirement planning is no day at the beach. But it doesn't have to be a miserable experience either. It usually just takes a little thought, a little time, and then a lot of automated action (like payroll deductions and dollar-cost averaging). Then, you occasionally check in on your plan to ensure it still makes sense for you, and that you're still on track.
Here's a rundown of the six biggest blunders that could readily derail even the best-laid retirement plans.
1. Assume a windfall is coming your way
It's certainly fun to dream about winning a lottery jackpot. Let's be realistic though -- it's very unlikely to happen. The odds of winning any Powerball drawing are one in 292 million. For Mega Millions, your chances of taking home the big jackpot are one in 302 million. You're (literally) more likely to be struck by lightning. Those odds? An alarming one in 15,300, according to the National Weather Service.
Even if you're being realistic about winning a lottery fortune, however, you also can't afford to assume you're due a major inheritance or will be able to sell your business for a sizable sum in the future.
2. Embrace risk without any realistic hope for reward
The idea of risk and reward has evolved over the course of the past couple of decades, but not for the better. Before, high risk was usually understood to mean greater volatility in exchange for bigger gains. Now, technology has facilitated the creation of new kinds of investments like cryptocurrencies and non-fungible tokens (NFTs), while the advent of web-based media has allowed some companies' true potential to be overstated and embellished. Groupon and GoPro come to mind. Some ideas seem brilliant on the surface -- at first -- but the odds of any plausible reward end up being rather slim. That only becomes obvious after it's too late.
Stick with stocks and investments with a track record of gains and proven potential for future returns.
3. Ignore tax considerations...now, or later
Your contributions to retirement accounts may reduce your taxable income right now. If they do, however, you'll be paying taxes on that money once you start taking it out of your individual retirement account (IRA) later. In most cases it's taxed just like ordinary income, meaning you may only be keeping on the order of 75% to 90% of your actual withdrawals.
Roth IRA funds won't be taxed when the money is taken out. Of course, you're not getting a tax break when you make a contribution, which ultimately means you have less money to live on or invest now.
Generally speaking, you want to pay your taxes when your tax rates are lowest. For some people that will be while you're working. For others it may be in retirement.
4. Fail to establish milestones
Is your goal to build a seven-figure nest egg by the time you're 65 years old? Great. However, to realistically reach that target you'll need roughly half that amount in place 10 years before. If you want half of that million dollars in place when you're 55 years old, you'll need on the order of $100,000 a decade before that to have enough time for the effect of compounding returns to do their job. These projections, of course, assume you'll continue contributing to the cause while your portfolio is growing.
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There are legitimate reasons you might find yourself off course when you check in. For instance, you might be looking at your balance in the midst of a bear market that will unwind itself a year later. Keep things in perspective.
Nevertheless, it's easier to focus on several consecutive shorter-term goals en route to the ultimate long-term one, and then adjust as needed.
5. Count on all your Social Security
Contrary to alarmist headlines, Social Security isn't going away. It is under a lot of stress though. Longer lifespans mean too many people are taking money out of the fund for much longer than they were expected to just a few years back, while too few people are putting money into the pool. If nothing changes in the meantime, a reduction in projected payouts is probable sometime in the mid-2030s.
Things are apt to change, of course; too many lawmakers' chances of being reelected hinge on the Social Security program's continued solvency to let things go unfixed.
All the same, the risk of reduced payouts (and the risk of the program remaining a political football) is too great to count on Social Security payments in the future.
6. Contribute too little to your nest egg
Last but not least -- and probably most important -- don't make the mistake of saving too little for retirement.
It's obvious to the point of being cliche. Yet, it still needs to be said: If you don't save and invest enough now, you won't have enough to fund a comfortable retirement later. As a rule of thumb (assuming you're working a full-time job for the typical 30 to 35 years), you should save at least 15% of your earnings to build a retirement fund that's sufficient to maintain your current standard of living.
It's easy to make this mistake. Unexpected expenses happen. Prices go up. Life is lived. Before you know it, there's not much money left to put into a retirement fund.
Nevertheless, it has to be done. Try automatically removing a set amount from your paycheck or bank account every month to ensure you're saving enough. It can be difficult at first, but you'll adjust. Pretty soon you won't even miss the money you're setting aside.
