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15 Money Mistakes That Could Jeopardize Your Retirement

By Christy Bieber - Oct 18, 2022 at 7:00AM
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15 Money Mistakes That Could Jeopardize Your Retirement

Don't let these errors impact your retirement security

Whether you are just starting your career or are nearing the end of it, the decisions you are making now could affect your retirement security.

Unfortunately, many people inadvertently make costly errors in preparing for their later years. You don't want to be one of them, so be on the lookout for these 15 money mistakes that could jeopardize your retirement.

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1. Starting to save for retirement too late

Saving for retirement as early in your career as possible is one is one of the most important things you can do if you want a secure future.

The sooner you begin saving, the wealthier you'll end up because of the power of compound growth. The money you save and invest earns returns that can be reinvested. This helps you grow your nest egg if you start saving when you are young.

Unfortunately, many people assume they have plenty of time or they prioritize today's needs instead of preparing for tomorrow. This is a huge mistake that could come back to haunt you as you'll have to save a lot more later to end up with enough to live on as a senior.

ALSO READ: 8 Strategies to Save for Retirement

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Piggy bank with dollar bills sticking out the top.

2. Setting your savings goals too low

Saving too little is also a major error that many people make. For example, many people follow an old rule of thumb that suggested saving 10% of income was sufficient. For most people, that's not the case anymore -- especially if they start saving late.

You should think carefully about how much income you'll need as a retiree and what your account balance needs to produce it so you can set an appropriate savings goal.

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Social Security cards and money.

3. Overestimating what Social Security will do for you

Social Security is going to provide you with some money in retirement. But it will not be enough to live on. Typically, Social Security replaces about 40% of pre-retirement income, while you need to replace about 80% or more.

If you assume Social Security will be sufficient, you're going to struggle throughout retirement. Don't make this mistake.

ALSO READ: Here's How Much Bigger the Average Social Security Check Will Likely Be in 2023

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Person wearing an apron in a supermarket smiles.

4. Being unrealistic about how long you can keep working

Another major mistake many people make is setting unrealistic expectations about the age of retirement.

If you expect to work well into your 60s or even into your 70s, you may assume you'll need less savings since your money won't have to last as long. And you may anticipate a higher Social Security benefit earned by a delayed claim.

Unfortunately, there's a very good chance you'll have to retire earlier than planned due to health or family issues or a lack of job opportunities for seniors. This can have dire consequences if you aren't ready to leave the workforce.

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ATM cash withdrawal of hundred dollar bills.

5. Not planning for a safe withdrawal rate

Whether you're far away from retirement or are leaving the workforce soon, you need to make sure you have a plan for a safe withdrawal rate. This is the rate at which you'll take money out of your retirement investment accounts.

If you take out too much money too soon, you'll drain your nest egg dry since you won't have enough invested to generate returns that help you maintain your balance.

Typically, you'll need to withdraw about 4% or less of your account balance to be confident your money will last. If you aren't being realistic about this, that's a huge mistake that could leave you short of funds later in life when you need the money the most.

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Rising and falling line chart with the word Inflation superimposed over numbers that include percentages, dates, and decimals.

6. Underestimating the impacts of inflation

When you estimate how much money you'll have saved upon retirement based on your current level of investing, you may see a number that looks big. For example, you may calculate that you'll end up with $1 million when you retire.

But you can't forget that inflation will eat away at the buying power of this money -- especially if you're a long way from retirement. A $1 million nest egg would produce around $40,000 of annual income -- but that may have the buying power of only around $20,000 or $30,000 in today's dollars if you're retiring decades from now (depending on the rate of inflation).

Be sure to take this into account when setting saving goals so you don't end up with too little.

ALSO READ: What Is Inflation?

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Tax documents on a desk with a pen, calculator, and note that says Tax Time.

7. Failing to understand tax rules applied to retirees

When planning for retirement, you can't forget to consider how taxes will impact the money available to you.

Taking tax rules into account is important for a few reasons. First, you can make sure you save enough so your after-tax income is sufficient to support you. And second, you can choose your retirement location carefully to find a spot that has favorable tax rules for seniors.

You can also make smart choices about the kinds of retirement accounts to use. For example, if you think your tax rate will be higher as a retiree, you might want to invest in a Roth IRA or 401(k) as this defers your tax savings until retirement. If you think it will be lower, a traditional account with up-front tax savings may be best.

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Doctor speaking with patient.

8. Not preparing for healthcare expenses

Preparing to cover healthcare costs in retirement is one of the key moves you need to make. Unfortunately, many people make the mistake of assuming Medicare will pay for all they need.

The reality is seniors can expect to spend thousands out of pocket on premiums, co-pays, and noncovered services. It's important to make sure you know what healthcare is likely to cost you and make a plan to pay for it.

ALSO READ: How Much Will Healthcare Cost in Retirement? Prepare to Be Shocked

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Labeled moving boxes, house plants, and coffee mugs in a den.

9. Choosing the wrong retirement location

Where you live in retirement can affect how long your money lasts. Many people make the mistake of staying put where they are or picking a place based on factors like nice weather or good amenities without considering the cost of living.

If you don't have an infinite amount of income, you need to consider how far your money will go in different retirement locales when deciding on the best spot for you.

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Person investing on computer and smiling.

10. Being too conservative in your investments

You want to minimize the risk of loss when investing -- but you can't be too conservative or your returns will be so low that amassing wealth will become very difficult.

It's important to avoid the common mistake of being so risk averse that you make it impossible to build the nest egg you need. And even as a senior, you can't be so conservative that your portfolio loses ground to inflation each year.

You should consider your age, investing timeline, and the amount of money available to you as you develop a personalized strategy for allocating your investment dollars.

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11. Being too aggressive in your investments

While being too conservative is a problem when investing, being too aggressive is also an issue.

While you can afford to take more risks when you're younger, you still can't gamble with your retirement nest egg. You need to balance risk versus potential rewards carefully and have a good mix of riskier and safer investments so you can earn the returns you need without an outsize risk of loss.

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Businessperson with illustration of asset allocation.

12. Failing to rebalance your investment portfolio over time

Investing for retirement isn't something you do once and forget about. Over time, you need to change your investment mix to match your current risk tolerance and investing timeline.

Unfortunately, many people don't rebalance their portfolio over time so they end up with the wrong investments for their stage of life.

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A desk with a calculator and a glass jar that says Emergency Fund and is full of cash.

13. Not maintaining an emergency fund as a retiree

If you are nearing retirement or in retirement already, you may be tempted to give up on maintaining an emergency fund. After all, saving three to six months of living expenses is a lot of cash to tie up. And you no longer need to worry about your paycheck stopping, so it may feel unnecessary.

The reality, though, is seniors can face costly emergencies, too. You don't want to have to sell investments to cope with them, so having emergency savings remains important. Don't make the mistake of assuming you don't need it anymore.

ALSO READ: Why Retirees Still Need an Emergency Fund

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Silhouette of someone pushing giant letters spelling the word Debt off a cliff.

14. Taking on too much debt

Borrowing a lot of money can be a huge mistake if your goal is a secure retirement. Owing interest and committing to payments can make it hard to invest enough for your future. And if you carry your debt into retirement, your payments can eat away at the fixed amount of income you have available to you.

It's best to avoid borrowing when possible, to prioritize debt payoff, and to make sure you aren't taking on large obligations when you're nearing your retirement years.

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A wallet full of money is locked up with a chain and a padlock.

15. Not making a spending plan

Finally, when you get close to retirement, you'll want to be sure to set a budget and outline where your money will go.

This will help you ensure you actually have enough to live on as a retiree so you can make any necessary adjustments such as relocating to a cheaper area or working longer to bulk up your savings.

Not making this plan could be a huge mistake because once you've quit your job, you could discover your nest egg just doesn't go far enough.

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Be sure to avoid these 15 big errors

You deserve to enjoy life as a retiree. By avoiding these 15 errors, you can make that happen. You can ensure you have the funds you need to spend your later years doing the things you love -- rather than worrying about how much cash is (or isn't) in your bank account.

The Motley Fool has a disclosure policy.

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