4 Pitfalls of Retirement Planning

Retirement is a time to relax, enjoy the fruits of your hard work, spend time with family, and more.

However, planning for retirement takes discipline and commitment. Not preparing adequately can make it harder to have a comfortable retirement or retire on your desired timeline.

This article will explore four pitfalls to watch out for when planning for retirement and some tips for avoiding them.

1. Not planning for inflation

Not preparing for inflation while you plan for retirement can reduce your purchasing power, leaving you with fewer assets.

To reduce the impacts of inflation on your savings, you must consider investing your retirement assets into investments that can keep up with or outpace inflation.

Stocks, bonds, and real estate have historically beaten inflation. Future investment performance cannot be guaranteed, but these assets could potentially help you protect your wealth against inflation and keep up with living costs.

2. Relying too heavily on social security

Social Security is a helpful safety net, but it may not be enough to be your sole retirement income source. Furthermore, putting all of your eggs in one basket, such as Social Security, could be detrimental if anything happens to the program or the economy in the future.

Instead, saving and investing for retirement while working is crucial. Contributing to workplace retirement accounts, investing in separate retirement and brokerage accounts, and building up savings can be good moves.

Furthermore, you can delay Social Security in retirement until age 70. The longer you delay it, the larger your benefit can be. Therefore, saving elsewhere can diversify your assets and bolster your Social Security benefit.

3. Not planning for taxes

Tax considerations can become more important in retirement since you will live on a fixed income that can come from several sources. The right retirement accounts and withdrawal strategy could potentially reduce your retirement tax burden and help you keep more of your money.

Here are some tax-advantaged accounts to consider:

401(k): Contributions are pretax and contribution limits are high. Employers may also match a portion of your contributions.
Traditional IRAs: Contributions are pretax, but withdrawals in retirement are taxed at ordinary income rates. These can work well if you earn a lot but plan on a lower retirement income.
Roth IRAs: You contribute after-tax money, but qualifying retirement withdrawals are tax-free. These can work well if you plan on having a higher retirement income.
Taxable brokerage accounts: These do not offer tax benefits themselves. However, you may qualify for favorable long-term capital gains tax rates if you sell stocks, bonds, and similar assets in the account after holding them for over a year.

Furthermore, taxes may impact where you live in retirement. For example, some states lack state income taxes. Therefore, these states are more tax-friendly to retirees.

Consider working with a tax professional to pick accounts and investments and devise a withdrawal strategy to minimize your tax burden.

4. Underestimating healthcare costs

Healthcare costs may go up in retirement because you may need medical care more frequently.

You qualify for Medicare at age 65, but Medicare may not be sufficient for your medical expenses. You may need to pay for prescription drugs, dental care, vision care, and long-term care, among other things.

There are several options to consider to prepare for healthcare costs:

Supplemental insurance: Buy insurance for health, dental, vision, and long-term care.
Open a Health Savings Account: These are available on plans the IRS deems to be high deductible health plans (HDHPs). Contributions are pretax, investments grow tax-deferred, and withdrawals are tax-free when used for qualifying medical expenses.
Saving and investing: Saving and investing extra in your regular accounts can help you pay for insurance premiums and out-of-pocket costs.

The Bottom Line

Retirement is one of the biggest financial goals most people will have. Proactive retirement planning is vital, including knowing and avoiding common pitfalls.

Account for inflation, don’t lean too heavily on Social Security, create a tax and withdrawal strategy, and prepare for additional medical expenses.

Following these steps can help you alleviate financial worries and truly enjoy your retirement.