15 Retirement Planning Mistakes You Can't Afford

You deserve to enjoy retirement without spending your later years constantly worried about how you'll survive financially. But in order to have the money you need to avoid major stress about covering your expenses, you need to make smart retirement planning choices.

Unfortunately, many workers make some mistakes when charting a course toward building the nest egg they need. You don't want to be one of them, so be certain you avoid all 15 of these big retirement planning errors.

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The first and most basic step in preparing for retirement is knowing what it will take to be financially ready. Unfortunately, far too many people haven't actually set a specific retirement savings goal.

If you don't know how much to save by the time you retire, and how much to invest each month to hit that target, you could be setting yourself up for a lifetime of money worries after paychecks stop coming.

ALSO READ: 2 Easy Ways to Estimate Your Retirement Savings Goals

You don't just need to think about how much you'll need for retirement -- you need a timeline.

That's because you'll need to save much more each month to retire early in your late 50s or during the start of your 60s than you would if you didn't stop working until 70 or older.

Unfortunately, many people plan to work for a long time, but then life gets in the way. It's best to err on the side of caution and prepare for an earlier retirement rather than anticipating a later one. This way, you'll be ready in case health or family issues force you to quit working sooner than you'd hoped.

If you're anticipating being able to survive on Social Security alone, you're making a huge retirement planning mistake.

Your benefits are intended to replace around 40% of what you were earning before leaving the workforce. That's not nearly enough. And a quick look at 2022's average benefit of $1,657 shows why having supplementary savings is critical.

Make sure you know Social Security is meant to provide only part of your retirement income so you can make a solid plan to come up with the rest.

ALSO READ: Why Your Social Security Benefit Is Sure to Disappoint You

Social Security benefits increase if you wait to claim them. In fact, getting benefits at 62 when your full retirement age (FRA) is 67 would result in a 30% reduction compared with your standard benefit. By contrast, delaying your first check until 70 increases the standard benefit by as much as 24% if 67 is your FRA.

While it's often the best financial move to try to wait until 70 in order to claim larger monthly checks, you can't assume this will be possible as you may have to stop working earlier and claim Social Security to fund your lifestyle.

Be sure you understand the impact of early filing, and don't assume that maxing out your Social Security is something you'll always be able to do.

If you set retirement savings goals without considering out-of-pocket spending on healthcare, you're probably going to run short of funds.

Healthcare can cost thousands of dollars per year as you age. This includes Medicare premiums, as well as costs you incur outside of what Medicare is willing to pay for.

To avoid this mistake that could lead to draining your nest egg, make certain you're estimating healthcare costs and taking them into account when deciding how large your retirement account balance needs to be.

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Speaking of Medicare, many future retirees believe that this government-provided insurance provides far more comprehensive coverage than it actually does.

The reality is that you can't count on Medicare alone as there are coinsurance costs and many types of health services are excluded, such as hearing aids, dental care, and long-term care.

Not only do you need to save to pay for these other healthcare expenditures but you also should make certain to research options such as Medicare Advantage or Medigap plans as you near retirement.

This can help you get the right coverage for your situation, and not doing the research could be a costly mistake that results in far higher care bills.

ALSO READ: Seniors Are Struggling With Medicare Costs, but This 1 Move Can Help

When you're making plans for retirement in the distant future, savings calculators may project that your retirement account balance will be pretty big. You may, for example, see that your 401(k) will be worth $1 million 30 years in the future if you invest in it steadily over your career.

When you see a large number, it's easy to assume you'll have plenty of money to live on. But you must remember that inflation eats away at your future buying power.

Because of the rising price of goods and services, $1 million in three decades won't provide nearly as much spending power as it does today. To avoid ending up with a nest egg that seemed substantial but doesn't cover the necessities, always take into account inflation's effects when setting savings goals.

Retirees could owe federal and state taxes on Social Security, 401(k), or other retirement account distributions and some pension income. The specific amount you'll owe will depend on where you live, as well as how much total income you have.

Unfortunately, many people underestimate how much of their retirement money will be taxed. As a result, they end up with too little left once the IRS and their state takes a cut.

Always research tax rules that will apply to you and aim to set retirement goals that ensure your nest egg will provide a sufficient amount of after-tax income to cover all you need.

ALSO READ: Retirees in These 37 States May Get to Keep More of Their Social Security Checks

There are several tax-advantaged accounts to help you invest for your future, including 401(k)s, traditional IRAs, Roth IRAs, and health savings accounts (HSAs).

Each offers its own unique advantages. For example, Roth IRAs allow you to defer your tax savings until the future, while HSAs offer a triple tax break if money is withdrawn for medical expenses.

Don't assume that a workplace 401(k) is the only plan you need. Instead, research each account that provides tax saving opportunities so you can make an informed choice about the best place for retirement investing.

Passing up employer matching funds is one of the biggest retirement planning mistakes that exists. This error means giving up the only chance you have to earn a guaranteed return on your investment that could be as much as 50% to 100%.

Forgoing free money for retirement savings makes it a lot harder for you to hit your goals and robs you not just of the contributions your company would have made but also the returns those contributions would have earned.

Don't lose out on this money -- learn the rules for earning your full employer match and invest enough to do it.

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Making the wrong choices about where to invest your retirement money is another costly planning mistake.

You should assess your risk tolerance each year and be certain your investment mix matches it. This could mean rebalancing your portfolio over time as you become more risk averse and as some assets outperform others.

You'll also want to confirm your portfolio is appropriately diversified to reduce the risk of outsize losses that can result from putting all your eggs in one basket.

ALSO READ: 5 Things to Know About Asset Allocation

It's inevitable you'll incur some expenses when investing, but you want to keep costs to a minimum. Fees can really eat away at your balance when investing over decades, and every dollar counts when it comes to retirement security.

To avoid losing out on potential returns because of high fees, always check what administrative costs your 401(k) is incurring, whether your brokerage firm charges any account or commission fees, and what the expense ratio is for investments you're choosing.

If you aren't confident in your investments, you may be tempted to sell at the first sign of a market downturn. Unfortunately, this can lock in losses and it often means you end up selling low every time you invest.

Long-term investing is a better bet, and you should buy only assets you'd be comfortable holding for many years.

Once you've invested, leave the money alone unless there's a fundamental change in the company or asset. And aim to always wait for a recovery after the market goes down, rather than rushing to liquidate.

ALSO READ: What Does This Market Correction Mean for Your Retirement Plan?

Taking money out of retirement accounts prematurely can result in penalties, a big tax bill in the year of your withdrawal, and the lost potential for returns your invested funds would have earned over time.

Early withdrawals should be avoided except in the most dire of situations as this retirement planning error can be really difficult to recover from.

Finally, you'll want to make sure you know how much you must spend as a retiree and confirm that your Social Security and savings will cover that amount.

The last thing you want is to give up your job and find you can't survive on your benefits and your savings at a safe withdrawal rate.

In this situation, it could be difficult to go back to work and you could undermine your long-term financial security by spending your nest egg too fast.

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The good news is, knowing about these retirement planning mistakes is half the battle when it comes to avoiding them.

Now that you're aware of these common errors -- and why they can be so costly -- you can make better and more informed choices as you prepare for your later years.

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