The Middle Class Keep Making 5 Retirement Mistakes — How To Avoid Them

There are so many variables when it comes to retirement planning that it can be easy to make some mistakes along the way. That’s why it’s so important to have a plan you can refer to if you ever find that you’re getting off track.

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But even if you’ve already automated your savings and maxed out your retirement plans, there are some acts of both commission and omission that can derail your strategy. Here’s a look at the most common retirement mistakes that the middle class keeps making, along with suggestions on how to avoid them.

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Withdrawing From Retirement Plans Prematurely

Probably the biggest single killer when it comes to retirement plans is withdrawing from them prematurely. Far too many people view a retirement plan as an emergency fund, and when they draw from it early, it has a devastating effect on their long-term savings.

For starters, most premature withdrawals from retirement plans come with a 10% penalty, in addition to ordinary income taxes. If you’re in the top bracket, the combined hit could reach 47%. And that’s before you even factor in state taxes.

Even worse, many people don’t use their retirement withdrawals to pay their penalties and taxes. It’s not until tax time rolls around that they realize they have a $2,000 to $5,000 bill waiting for them.

Withdrawals of contributions from a Roth IRA are tax-free. However, the other major problem with taking money out of a retirement plan early is that you’re foregoing your savings, along with all the compound interest they would generate.

Imagine that you’re 30 years old, for example, and you withdraw $10,000 from your IRA. By the time you are 65, assuming an 8% average annual return, that $10,000 would have grown to about $163,000 (using Dave Ramsey’s Investment Calculator). If you don’t replace that money in your retirement account, what might seem like a relatively small withdrawal could actually cost your nest egg hundreds of thousands of dollars.

Resolution: The key here is to avoid taking premature retirement withdrawals at any cost.

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Overlooking the Effects of Inflation

Inflation is an unavoidable part of daily life. While most Americans have felt the pain of rising costs over the past few years, many overlook planning for inflation in their retirement.

Imagine, for example, that you anticipate drawing $50,000 from your retirement account every year to pay your bills. Even at a relatively modest 3% inflation rate, in 10 years, you’ll need $67,195 to fund the same lifestyle. In 20 years, that number will jump to $90,305 — almost double the original amount.

Resolution: Factor in inflation when building your nest egg, and use calculators to determine how much money you’ll really need as your retirement continues.

Thinking They Can Always Start Later

One of the most important factors in the size of your retirement account is the age at which you start saving. While compound interest has been dubbed the “eighth wonder of the world,” it only really makes its mark when you’ve already been saving for decades. If you don’t use the time you have to earn compound interest, you’ll have to significantly boost the amount of your contributions instead.

Imagine that you start saving $300 per month at an 8% annual return starting at age 25. By the time you’re 65, your account value will top $1 million, reaching approximately $1.047 million. If you wait until age 40, you’ll need to sock away $1,110 per month to reach the same figure. In other words, by waiting those 15 years to save, you’ll have to save nearly 4x the amount of money to reach that $1 million nest egg.

Resolution: The simple way to avoid this problem is to automate your retirement plan contributions as soon as you start drawing your first paycheck.

Underestimating Healthcare Expenses

Although some expenses do indeed fall in retirement, you should expect your healthcare costs to jump. True, you may be eligible for Medicare at age 65, and you may have other insurance in place, as well. However, according to RBC Wealth Management, even after factoring in all of this assistance, you should expect to spend at least 15% of your income on healthcare in retirement.

Resolution: Anticipate a jump in healthcare costs in retirement, and budget accordingly for it.

Using Hope (and Speculation) as a Strategy

Some investors put all their eggs into one basket in their retirement plans, hoping to hit it big with a single winner. A retirement account is not the place to speculate, however. The downside risks are simply too great. If you bet all your money on a single stock and choose the wrong one, you might find that you saved your entire life for retirement and have nothing to show for it.

The same is true if you’re overly speculative, betting your life savings on a volatile asset like bitcoin, for example. This doesn’t mean that you have to keep all your retirement money in Treasury bills. You’ll need growth in your retirement account to achieve your goals. But diversification and consistent investing are the key to building long-term wealth, not speculation.

Resolution: Keep your account diversified, regularly rebalance and adjust it, and continue contributing every month.

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