National Retirement Planning Experts

National Coverage
Local Professionals

8 Money Mistakes That May Harm Your Retirement

It's not easy to plan for retirement. As retirement approaches, there are numerous considerations to make, including when to claim Social Security, how much to withdraw from your 401(k), and how to invest your retirement funds moving forward.

But often, individuals make common errors while planning their retirement that can have serious and far-reaching implications. If you're not careful, you may derail your retirement planning and lose all your hard-earned corpus. If you wish to learn about common financial mistakes that people commit and how to avoid them, reach out to a professional financial advisor who can advise you on the same.

So, what are some top retirement mistakes that individuals often commit? What can you do to avoid common money mistakes in general, besides retirement? Well, below are a few retirement mistakes to avoid, which will help safeguard and protect your money.

What money mistakes can harm your retirement?

1. Not having a retirement plan

One of the worst and most common financial mistakes that you can make is not starting the retirement planning process or starting when it's too late. It is highly advised that you start planning for retirement early on and think about how you want your future to look and how much money you need to live comfortably during retirement.

Some companies provide 401(k) plans, pensions, and other retirement plans such as individual retirement accounts (IRAs). In fact, you can also start an IRA without the help of your employer. These retirement plans may help provide better returns and diversification than a standard savings account and are a good place to start building your retirement corpus.

Most individuals do not give retirement planning as much importance as they should, which can prove to be disastrous in the long run.

2. Not taking inflation into account

Inflation may arguably be the most ignored aspect of retirement planning. Inflation determines the purchasing power of money and can significantly eat into your returns. With inflation on a 40-year high in the US and the likelihood of it only rising further, you may be in for a rude surprise later if you do not have a strategy in place to counteract the same.

From basic groceries to your capital returns, inflation severely impacts your corpus earnings.  A full course meal may cost you more a few years down the line. Thus, not considering inflation when planning retirement can spell trouble and put a strain on your retirement savings.

When the value of money erodes due to inflation, that seemingly safe nest egg can lose its purchasing power faster than you can anticipate. It is better to prepare for inflation and account for the same in your retirement planning early on.

3. Not planning for taxes

This is not just a retirement mistake but also a very common money mistake in general.

While planning for retirement, oftentimes people forget to consider the ensuing taxes. This includes any taxes due on capital gains, your income, earnings from your 401(k) or IRA, etc. Taxes will affect every major money decision you make, both before and after retirement. From inheritance to the estate to capital gains, all will attract enormous tax bills. Hence, you need to be prepared beforehand to navigate your way through them.

If you ignore the tax component, then no matter how large your gains are, you may receive very little in your hands.

4. Choosing the wrong financial advisor

Hiring a financial adviser is critical and considered to be prudent whether you're trying to manage wealth or planning a secured retirement. Regrettably, not all advisors may have your best interests in mind. If you hire the wrong advisor, you may end up losing a significant chunk of your corpus.

Always interview multiple financial advisors before zeroing on one. Before making a decision, talk to them, ask them questions about their investment philosophy, and evaluate their qualifications and certifications. Inquire about their fee structure and how long they've been in business. Always work with a fiduciary or a financial planner who is legally obligated to put your needs ahead of their own.

Before hiring an advisor, remember that these individuals will manage your wealth, will, real estate, stock portfolios, legal issues, and retirement. Any discrepancy here can acutely damage your future irreparably.

5. Underestimating your life expectancy

When planning for retirement, individuals often forget to account for a realistic life expectancy. The extra years will put a big strain on your finances if you save, for instance, for 75 years of life but live till 85 years of age.

The good news is that you might live far longer than you think. The bad news is that you might need more money than you accounted for. To avoid this, one can create a detailed retirement plan, keeping in mind their most realistic life expectancy and all major expenses that they intend to incur in retirement.

Alternatively, one can consider investing in avenues such as annuities, which can issue regular payments throughout one’s life. In other words, your money management has to be more or less accurate with your life span for meaningful planning.

6. Cashing out your 401(k)s

The average cash-out amount for a person under 40, moving employment is $14,300, according to a leading asset management firm. If you hit a financial emergency, cashing out your 401(k) may seem like a sensible decision, but it can have disastrous effects.

You may face tax penalties if you cash out or take money from your 401(k) before reaching the age of 59 1/2. You may be subject to a 10% early withdrawal penalty in addition to any other applicable federal and state income taxes. Furthermore, your 401(k) plan administrator will normally deduct 20% of your balance to pay taxes.

Now, this may not be considered as wise money management. You would want to make use of every penny you contribute to your 401(k) and not waste the same in taxes. Withdrawing 401(k)s is a common early retirement mistake that you must avoid to build a stable corpus during retirement.

7. Not increasing your savings

The amount of money deducted from your salary to invest toward retirement is known as a retirement savings rate. For instance, if you take $2000 from your $30,000 monthly salary, your retirement savings rate is 6.6 %. As your salary rises, you may consider increasing your savings rate.

Not increasing your savings in line with inflation can reduce the corpus you accumulate by retirement. Inculcating a habit of saving and increasing your savings rate as and when possible is considered to be a healthy practice and can go a long way towards creating a large retirement corpus.

8. Taking irrational risks

Risk is a tricky subject. If you take too much risk, you risk losing your money. However, if you take too little, you risk losing purchasing power due to inflation.

When young, individuals tend to make impulsive decisions especially when it comes to money. Also, in the early 20s-40s, a person's risk appetite is generally higher. This is natural because you have the luxury of time on your side. You can invest in risky assets and can also switch jobs if you so please. But as retirement nears, this lifestyle may no longer be a viable option for you.

Taking irrational risks and being careless with money can prove to be disastrous in the long run. Individuals need to note their age, personal circumstances, and other factors before they make any decisions, especially if they are close to retirement. For instance, a 60-year-old cashing out his entire 401(k) to invest in cryptocurrencies is an extremely unwise decision.

Age defines risk, and this should always be kept in mind to avoid retirement and money mistakes. You must work towards having a balanced investment portfolio where you are either not overly exposed or too conservating in your investment approach. Find investments that will keep your income flowing and beat the prevalent inflation rate, all while diluting your risk. 

To conclude

Money is a subject that very few have decoded successfully. Being a good money manager will ensure that you are well-prepared for retirement. It is important to start planning early on to ensure a secured retirement. Also, one needs to consider various components such as risk, taxes, and inflation to ensure that you have a stable future post-retirement. The above-mentioned money mistakes can possibly harm your retirement planning. So, carefully manage your money no matter what age you are at and reach out to a professional if you need help with the same.

Use the free advisor match tool to match with an experienced and certified financial advisor who will be able to guide you effectively on which money mistakes to look out for and how to avoid making them. Give us basic details about yourself, and the free match tool will match you with 1-3 professional financial fiduciaries that may be suited to help you.


The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

Search for articles


Free Service | No Obligation to Hire

  Your Information is Safe and Secure