Bob Chitrathorn CPFA, CFO/Vice President of Wealth Planning. Author.
Saving for retirement is one of the most critical financial goals in life, yet many people approach it the wrong way. They follow outdated strategies, ignore essential factors like inflation and tax efficiency, or are overly conservative in their early years, missing out on compound growth.
The result? A retirement that’s underfunded, leaving many scrambling to adjust their lifestyles when they should be enjoying financial freedom.
Here are six reasons why most people are saving for retirement wrong and how you can avoid making the same mistakes.
1. Underestimating The Impact Of Inflation
One of the biggest mistakes is underestimating inflation. Many assume that a fixed savings goal will be enough, not realizing that the cost of living increases over time. Historically, inflation has averaged around 2% to 3% annually, and recent years have shown that it can spike higher. What might seem like a comfortable nest egg today could lose half its purchasing power in 30 years.
To counteract this, it’s crucial to adjust savings goals accordingly and invest in assets that outpace inflation, such as stocks and real estate. Increasing contributions over time, rather than sticking to a static amount, can also help keep pace with rising costs.
2. Being Too Conservative Early On
Another common misstep is being too conservative too early. While the fear of market volatility is understandable, young investors who prioritize low-risk bonds or savings accounts over equities miss out on significant long-term growth.
The difference is staggering: Investing $10,000 annually in a low-risk bond portfolio earning 3% will amount to about $475,000 after 30 years, whereas a diversified stock portfolio averaging 8% could grow to over $1.1 million.
Younger investors should take advantage of risk and maintain a stock-heavy portfolio, adjusting their allocation as they approach retirement.
3. Overlooking Tax Efficiency
Tax efficiency is another factor that many people overlook. Simply saving a set dollar amount isn’t enough; it’s also about where that money is going. Taxes can erode wealth over time if not strategically managed.
Maximizing contributions to tax-advantaged accounts like 401(k)s, IRAs and HSAs should be a priority before putting money into taxable accounts. Diversifying across tax-deferred, tax-free and taxable investments can provide more flexibility in retirement, and understanding how to withdraw funds in a tax-efficient manner can save thousands over time.
4. Relying On A Single Retirement Benefit
Another miscalculation is relying too heavily on a single income source such as Social Security or an employer pension. Many assume these will be enough to sustain them, but Social Security is designed to replace only about 40% of pre-retirement income, and pensions are becoming increasingly rare.
Creating multiple income streams is a smarter approach. Rental properties, dividend-paying stocks, annuities and even part-time consulting work can help supplement retirement funds. Delaying Social Security benefits when possible can also increase monthly payouts significantly.
5. Failing To Plan For Health Care Costs
Health care expenses are another area where people often fail to plan adequately. A 65-year-old couple retiring today may need an estimated $315,000 to cover medical costs throughout retirement, yet many don’t factor this into their budget.
Health savings accounts (HSAs) offer an excellent way to prepare, thanks to their triple tax advantages: tax-free contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Additionally, it’s important to remember that Medicare doesn’t cover everything, and long-term care can be a significant out-of-pocket expense. Considering long-term care insurance may be a prudent move, particularly for those with a family history of chronic illness.
6. The ‘Set It And Forget It’ Mentality
Perhaps the most pervasive mistake is the “set it and forget it” mindset. Retirement planning isn’t a one-time task but an ongoing process.
Regular reviews and adjustments are essential, whether it’s rebalancing a portfolio to maintain the right mix of assets, increasing contributions as income grows, or adjusting withdrawals to maximize tax efficiency. Estate planning should also be part of the equation to ensure assets are distributed according to personal wishes.
Taking Action Now For A Secure Retirement
Most people approach retirement savings with good intentions, but missteps along the way can have serious consequences. Understanding the risks of inflation, making smart investment choices, optimizing taxes, diversifying income sources, planning for health care and actively managing a financial plan can set the stage for a more secure future.
It’s never too late to make adjustments. The key is to take action now and be proactive in financial planning. At the end of the day, retirement isn’t about stopping work—it’s about having the freedom to live life on your own terms.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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