Whether you're already retired or are thinking about leaving the workforce in the future, there are certain retirement mistakes you cannot afford to make this year. These errors could jeopardize your ability to live comfortably throughout your senior years, which is the last thing you want when you no longer receive a paycheck.
So, what are some big errors you don't want to make right now? Here's what you need to know.
Image source: Getty Images.
1. Forgetting about the impact of inflation on retirement spending
Inflation has been packing a major punch for the past several years. While prices have started to stabilize and inflation has been cooling after surging in the post-pandemic era, the Consumer Price Index still showed a 3.7% year-over-year increase as of August 2023.
The post-COVID inflation surge has hit many Americans hard, and it serves as an important reminder that the value of a dollar does decline over time -- sometimes substantially.
If you are decades away from retirement and trying to determine how much money will be enough, you must keep inflation in mind. While a $1 million nest egg might sound like enough when you see that big number on a retirement calculator, it won't actually be worth anywhere near $1 million in today's dollars if you're still 30 years from retirement.
And if you're already retired, keep in mind that inflation can mean your savings don't stretch as far, so you must be more careful with spending to avoid withdrawing too much and running your accounts dry.
2. Not having an emergency fund to cover surprise expenses in retirement
For many people, it may seem like there's been one emergency after another since 2020, with the pandemic coming first and then rapidly rising prices to contend with. And now, some reports indicate COVID cases and new variants are on the rise again, raising concerns of a difficult winter.
If these events have taught us nothing else, it's that you cannot predict what is going to happen. Both current and future retirees need to be prepared for anything that life throws at them, which means it's important to have an emergency fund with at least three to six months of living expenses in it.
You don't want to make the mistake of thinking this is unnecessary once you're retired because you can't lose your job anymore. You could still face surprise costs that you must cover, and you don't want to be forced to take money out of your 401(k) at an inopportune time to pay them.
3. Over relying on Social Security to provide financial security
Finally, the last mistake you cannot afford to make is becoming too dependent on Social Security to provide for you as a retiree.
Recent reports from the Social Security Trustees indicate that the program's trust fund could be depleted by 2034, which means the reserves are running out faster than anticipated. This doesn't mean benefits will stop, but if lawmakers don't act, it means benefit cuts could be on the horizon. Retirees would only get about 77% of promised benefits if the trust fund ran dry, which could be a huge financial shock.
The bottom line is, no one should be betting their entire retirement on Social Security providing exactly the promised benefits. Even if automatic cuts don't happen, lawmakers could make changes that reduce your benefit, or you might have to claim it early due to a job loss and shrink it yourself due to early-filing penalties. And, even in a best-case scenario, Social Security only replaces about 40% of pre-retirement income, which is not enough to live on.
Make sure you have plenty of money to supplement Social Security so you don't rely on these benefits to do more than they should -- and so you can withstand changes to the program. If you haven't yet retired, you can accomplish this by saving more money as soon as possible. And, if you are already retired, be sure to maintain a reasonable withdrawal rate from your investment accounts so you don't run them dry and rely on Social Security alone.
Fortunately, these mistakes should be easy to avoid, both for current and future retirees. Now that you know why you need to avoid them, that's the first key step to making a plan to do so.
