Keeping an eye on these important aspects of retirement planning can help you stay on track for the retirement you want.
A simple truth about retirement: The way to help create the retirement you want is to plan for it. And that means creating a specific course of action that’s built around your needs and wants, not just doing what it seems like everyone else is doing when it comes to retirement planning.
A lot of factors can impact your plan, including how close you are to retirement—retirement planning looks different for those nearing retirement than it does for those who are just starting their careers. That said, there are seven common retirement planning mistakes that everyone should know about. Here, John Knowles, lead business growth strategy consultant with Wells Fargo Wealth & Investment Management, identifies those mistakes and offers tips to help you avoid them so you can work toward the retirement you want.
Retirement planning mistake #1: Having an incomplete plan
If you have not thought about what you plan to do in retirement, your savings goal may not match up to your retirement spending needs. Does your goal amount include considerations for monthly essentials (health care premiums, utilities, food) as well as discretionary spending (travel, hobbies)?
There are plenty of retirement budget planning tools that can help you estimate a broad range of potential retirement costs. With estimated costs in hand, you can work with your financial advisor to estimate what your portfolio goal amount may need to be.
Retirement planning mistake #2: Not knowing your retirement timeline
It’s never too early to start planning and saving, even if your retirement is decades away. However, as you get closer to retirement, the advice you receive and the actions you take will change.
When you approach the five-to-10-year mark, start to focus in on your retirement date. “I did this for myself when I turned 52 and suddenly realized I’m on a 10-year clock,” Knowles says.
Establishing the timeline between now and your planned date can help you get organized. Some questions to consider: Will you still have a mortgage? Are you planning to move? How might your lifestyle change, and have you planned for those costs? The answers to these and other questions can help you and your advisor adjust your retirement planning strategy.
Also keep in mind you might retire sooner than you expect. How prepared are you for an unexpected retirement event? You may want to review your plan with your advisor with that in mind. For example, according to a Pew Research study,1 retirement rates spiked during the first years of the pandemic, with half of adults ages 55 and older reporting themselves retired at the end of 2021.
Retirement planning mistake #3: Overspending
Knowles says the two most important words while living in retirement: spending discipline.
What you can afford to spend during retirement depends on your streams of income. As you age through retirement, your priorities will change. Travel and hobbies in your younger retired years will likely lessen as health care tends to become a greater expense in later years.
With that in mind, you should understand where your retirement income will come from — savings accounts, 401(k) accounts, pensions, Social Security — and plan what’s right for you.
“You can take Social Security as early as age 62, but that doesn’t mean it’s what you should do,” Knowles says. “Work with an advisor to review your income streams before determining what approach may be right for you.”
Retirement planning mistake #4: Lack of diversification
This is about having the right mix of investments to help manage risk during economic downturns. You may want to consider establishing a separate cash reserve to draw from rather than from your investment accounts when the market is more volatile.
One aspect of diversification to discuss with your advisor: diversification of account types with regard to tax exposure. Many people are saving in a traditional 401(k), Knowles says, but there are additional opportunities to consider for tax reasons. Consider this: income from a traditional 401(k) or traditional IRA is taxed when withdrawn, while income from a Roth 401(k) or Roth IRA is taxed when invested. Having both traditional and Roth accounts in retirement can give you the flexibility to choose where to pull income from and when, Knowles says, which may make a big difference if future tax rates fluctuate.
Retirement planning mistake #5: Misunderstanding your risk tolerance
Your risk tolerance (that is, the level of volatility that you are prepared to accept in exchange for higher potential returns) will likely change as you approach retirement age. In your 30s and 40s, if you are taking more risk, it may be easier to accept market volatility because you won’t be using your retirement savings for a long time, Knowles says.
“As you approach retirement, five-to-ten years prior, you may want to dial back on risk, which may help reduce volatility,” he says. An advisor can help you assess your risk tolerance and investments as you approach retirement.
Retirement planning mistake #6: Underestimating the cost of retirement
Knowles says younger investors often think of retirement as 15 to 20 years of their life, but as they get closer to retirement age, they recognize that their retirement years may actually span 30 years or more. And with that longevity typically comes changing financial priorities, especially around health care, that might require more savings than you originally thought.
“Health care costs often get underestimated twice,” Knowles says. “First is when people think about retiring early and purchasing their own health care coverage before they qualify for Medicare coverage at age 65.” The premiums and co-pays may be manageable in your early retirement alongside other spending, but as you get older, you may spend more on health-related expenses than anything else. Retiring earlier than 65 may still be an option, but it’s wise to work with an advisor to estimate those costs accurately for your particular situation.
“Second are health-adjacent expenses that people don’t think about at first,” Knowles says. These include things like modifying your home to accommodate your needs as your mobility changes or spending to move to be nearer to family or caregivers. Planning early for these expenses can make them easier to manage when the time comes.
Retirement planning mistake #7: Going adrift
Just like any journey, the road to retirement will have events that may cause you to detour to keep moving forward. The most important thing to remember is that your plan is there to help you stay on course.
Whether it’s well before retirement or once you’re nearing retirement age, reacting to uncertainty and volatility with decisions that veer wildly from your plan may not be in your best interest.
On the other hand, not reacting at all as circumstances change can be just as detrimental. A trusted investment professional can help give you knowledgeable perspective and guidance to help keep your plan on track.
“The world will continue to change around you and things are going to happen,” Knowles says. “Inflation, a spouse or partner passing away, helping support younger generations … your advisor can be your sounding board through all of it and help you decide what may be in your best interest to do.”
1. Amid the pandemic, a rising share of older U.S. adults are now retired; Pew Research Center, November 4, 2021.
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are federally tax-free provided it has been more than five years since the Roth IRA was funded AND the owner is at least age 59 ½ or disabled, or using the first-time homebuyer exception, or taken by their beneficiaries due to their death. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to an IRS 10% additional tax if distributions are taken prior to age 59 ½.
Wells Fargo Advisors is not a tax or legal advisor.