The 6 Most Common Retirement Mistakes

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I enjoy reading studies to see what we can learn, especially when they focus on the most common retirement mistakes.  What regrets do other retirees have, and what can we learn from them?

Today, we’ll take a look at one such study and discover that 43% of retirees have regrets, as well as outlining the most common retirement mistakes identified by the study.  Along with identifying the mistakes, I’ll add my commentary on steps we can all take to avoid them.

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The 6 Most Common Retirement Mistakes

We’re all afraid of making mistakes, especially when it comes to our retirement planning.  What are the most common retirement mistakes, and what can we do to avoid them?  Fortunately, we have some insight into that question today.  This one’s a “must-read” for anyone in their final 5 years of work.

The University of Michigan recently released a study titled “Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement”.  The comprehensive study was based on data pulled from 4,632 adults and entails an intimidating 57 pages.  I’ll save you the task of reading the study and summarize the study in today’s post, along with some of the study’s charts (because we all love charts, right?)

Below is a summary of the most common retirement mistakes, including my thoughts on how best to avoid them.


1. Too Optimistic About Anticipated Retirement Benefits

The report states that we all have biases that negatively impact our decision-making processes, and a common retirement mistake is being overly optimistic about anticipated retirement benefits.   Social Security makes up 85% of individual income for those at the bottom quartile of retirement income, and many folks don’t really understand what their social security benefits will be when they make their decision to retire.  Further, they’re optimistic about their cost of living, and fail to recognize the gap they’ll have between their spending needs and their social security income.

This misplaced optimism leads many to under-save for retirement during their working years, creating a compounding effect on their retirement income in their later years.  Many people, unfortunately, end up living a life in retirement that is below their expectations.   

To Avoid This Mistake:  The study found that those who were the least knowledgeable about their retirement benefits were the same ones who tended to be overly optimistic.  The solution:  Take the time to understand your future retirement benefits BEFORE you make the decision to retire.  Preparation is the key to avoid this common retirement mistake.  If you’re nervous about making the decision without professional help, hire a Certified Professional Planner to help you run the numbers.  This is one mistake you must avoid.  


2. Low-Income Earners Are Less Informed

The paper cites their finding that financial knowledge is directly correlated to effective retirement preparedness.  Less financial knowledge, less effective retirement preparedness.  Less preparedness, in turn, leads to higher chances of making a mistake.

Those who earn higher incomes are more likely to be those with higher financial knowledge.  Their premise is that higher earners have a drive to learn financial planning concepts to manage their higher wealth.

Lower earners, conversely, are less likely to be knowledgeable about financial planning.  This lack of financial knowledge leads low earnings to be more likely to make the first of the common retirement mistakes, being overly optimistic about retirement benefits.  The result is lower social security literacy among those who need it the most, a dangerous combination.

To Avoid This Mistake:  If you’re a low earner, do NOT use it as an excuse to be uneducated about your personal finances, especially related to your future social security benefits.  Low earners tend to be more prone to making retirement mistakes, so be especially careful in making your retirement decision if you’ve not accumulated significant wealth.


3. Claiming Social Security Too Early

Among those participants who were already retired, 43% stated they “would want to be able to change something about their current retirement”, as shown in the chart below.  Regrets were inversely related to educational levels.

43% of retirees have regrets and want to change something about their current retirement. What are the top regrets? Today, we review them. Click To Tweet

Top among the regrets?  Social Security claiming age, with 22% citing regret over when they chose to start their Social Security benefits (20% of retirees would have liked to have claimed later).

To Avoid This Mistake:  Many people claim Social Security at the earliest possible time, a decision which will have profound impacts on Social Security benefits through your retirement.   Read “Should You Take Social Security at age 62 or 70?” to see how we’ve determined when to claim our social security benefits (FYI, we’re waiting until age 70).


4. Retiring Too Early

Among retirees with regrets, the majority of those regrets focused on their lack of income in retirement.  Retiring too early is one of the common retirement mistakes that’s very difficult to correct, and folks who retire before their finances are sufficient to support your retirement lifestyle often face regrets for years.  37% of the respondents with regrets wish they had continued working longer than they did. 

Many of these retirees had unrealistic assumptions about their retirement benefits (see Mistake #1), with 21% of respondents citing their benefits were substantially different than they had expected.  Again, those with lower educational attainment were the most likely to be receiving Social Security benefits lower than expected.

To Avoid This Mistake:  If you’re unsure about your retirement decision, don’t be in a rush to leave the workplace.  Consider working One More Year, like I did. Use the additional year to do a deep dive into your numbers and make sure you fully understand the implications of your timing decision before you pull the trigger.  Having a bit of a “cushion” in your numbers may cause some discomfort in working a bit longer, but it’s likely preferable to spending your years of retirement with regrets.


5. Not Understanding Social Security

Among survey respondents who were not yet retired, more than 50% stated they do not have a good estimate of their future Social Security benefits.  Further, 12% of those who expect to retire at age 65 assume they’ll be receiving benefits above the current legal maximum.  Seeing this lack of knowledge of social security in pre-retirees is concerning, especially in light of the number of retirees who have regrets over their lack of income in retirement.

To Avoid This Mistake:  If you’re among the 40% of those in the age 50 bracket who have no idea how much Social Security you’ll receive, it’s time to get serious.  In my final 5 years of work, I entered my estimated Social Security income for various claiming ages in a spreadsheet, every year.  They’re available at ssa.gov, and you shouldn’t retire until you’ve logged in and confirmed that you’re using realistic assumptions for your social security benefits.


6. Lack of Retirement Planning

Another of the common retirement mistakes is the lack of planning many folks invest in their retirement decision.  Based on this study, only 30% of folks in the sample adequately determined their retirement needs and developed a plan to ensure sufficient income was in place to cover the requirements.

Considering the common retirement mistakes cited earlier, a solid retirement plan would be an appropriate approach to mitigate our innate behavioral biases.  Without this plan to double check our assumptions, the combination of these mistakes leads to poor decision making and future regrets in retirement. 

To Avoid This Mistake:  Don’t retire until you have an accurate estimate of your spending requirements throughout retirement.  Here’s how I made ours.  Once you’ve developed realistic spending estimates, determine your projected income through retirement, including an appropriate Safe Withdrawal Rate (here’s how we developed our Retirement Income Plan).  Having a firm grasp on your retirement expenses, and a realistic projection of how your retirement income will cover those expenses, is the one essential piece you MUST have in place before you make your decision to retire.  Don’t retire without understanding these critical elements.


Conclusion

The report’s conclusion is worth a read, so I’ll capture key elements verbatim:

“Our results on retirees corroborate that expectations about retirement are often biased, as retired individuals
reported that on average they had been too optimistic about their retirement benefits.”

“…these biased expectations … can lead, on average, to lower savings for retirement than would be optimal. Moreover, our results indicate that this affects the experience of retirement.”

“A large fraction of retirees express regrets about the choices they made about retirement.”

“If individuals could reduce their uncertainty about future retirement, they would probably have fewer regrets after
retirement.”

My Closing Thoughts:

Clearly, the need to do appropriate planning for retirement pays tremendous dividends once you’ve entered retirement, and yet only ~30% of retirees report having a detailed retirement plan.   Lacking a plan, many retirees realize, too late, that they had “bad” assumptions and are now facing regrets which will be hard to overcome.

Learn from these common retirement mistakes, and make sure you’ve developed a solid retirement plan prior to finalizing your decision to retire.  If you’re uncomfortable doing it yourself, hire a professional.  This is one area where it pays to hire an expert.  

Retirement is one decision that’s too important to make without knowing the facts.

Learn from, and avoid, the common retirement mistakes of others.

Your retirement will be better as a result.

#NoRegrets

Further Reading: 

Your Turn:  What other common retirement mistakes do people make?  What tips do you have to help people avoid making mistakes when planning their retirements?  Let’s chat…

15 comments

  1. Thank you Fritz for a great overview of the six most common mistakes!

    If you were to add a 7th mistake, I believe many retirees overlook the softer sides of retirement . Maybe because we’re all conditioned to focus on the financial aspects. Yet these other aspects are equally important. For example, last week, your book review (everyone should read the book) highlighted the importance of relationships. The quality of our relationships (or lack thereof) have a major correlation with our happiness and ultimately, quality of life. Then, there’s sense of purpose and doing something that is meaningful rather than just time filling.

    I recognize lots of folks struggle and never truly achieve financial independence. For those of us that have prepared, these softer sides take on greater meaning.

    1. Agree that everyone should read the book. I devoured it in one sitting and then I went back and read it again slowly.

    2. Shannon, I’m in 100% agreement with your #7. As you know, the “softer” side of retirement planning is a passion of mine, and often overlooked by those planning for retirement. Nice addition to the discussion, thanks for confirming the book I reviewed last week is worth a read!

  2. Thanks Fritz, great read!

    I’m 59 and have about 7-1/2 yrs left until retirement (I love my job & really don’t want to retire yet, plus want a better financial situation than I would have if I retired now). But that hasn’t stopped me from getting a good start on the planning part of it…my wife says I am obsessive about it!

    I think some of this stems from my Mom. She did absolutely ZERO planning for retirement, and is now paying the price (actually we are paying some of it, as we have to send her a check every month). She took Social Security early, while she was still working, and had no clue what her income or expenses would be in retirement. I really don’t want to end up in that situation, so I’m “going extreme” on the planning side of things.

    Thanks for doing the work you do. I enjoy reading your work, even if I’m still a few years out from retirement. Articles like this one are especially good for people like me.

    1. Tony, Thanks for sharing the lessons you learned from your Mom’s lack of retirement planning. I, like you, went a bit “extreme” on the retirement planning side of things, but looking back now from the perspective of two years in retirement, that planning has served me well. I wish the same for you!

  3. Hi Fritz,
    I think learning from others mistakes or wisdom is the highest form of intelligence, so I take insight like this with high regard. It is great that you continue to put thinking like this in front of your readers as it helps so much in prospective.

    The one thing I would add is to insure that people in the quest to eliminate regret do not constantly worry about their choices. One of my favorite quotes about worrying is from a song called Sunscreen. “Don’t worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday.”

    The takeaway being make sound decisions based on the facts at hand, periodically evaluate the results and adjust accordingly but don’t overtly worry and fret. Your posts help add support a constructive thought process.

  4. Excellent read Fritz and thanks for the summary. Very interesting data and, as you point out, certainly underscores the need to be both informed and have a plan in well in advance of actually retiring.

  5. Thank you. As someone who will be receiving a pension, I know that my social security benefits will be limited, if non-existent. Very important to educate oneself now. . . before retirement.

    1. Deb, you’re fortunate to be receiving a pension. I’m in that same (small) group, and consider it a true blessing. Regardless of whether a person receives a pension or not, the need for education and planning is critical to everyone as they make the decision on when to retire. Thanks for stopping by!

  6. Not considering taxes. A lot of planning is done using gross numbers. Taxes hurt, especially if one spouse dies, bumping the other spouse into a higher tax bracket.
    Also the opposite of no. 4 – retiring too late. Can’t buy back time. Yes we are generally are living longer, but suspect that the “good years” have not extended in proportion to our overall longevity, i.e. our best years physically are still our 50’s and 60’s. Give up those years and you may end up living quite comfortably financially – in your rocking chair. I would love to see a study on this subject.

  7. Great post Fritz, enjoyable and thought provoking as always. When I was in college all economics majors were required to take a class on retirement planning. It was one of my most beneficial classes as it put me on a planning path to my own retirement. My wife and l are currently traveling around the country on a Fall RV trip and I know we wouldn’t be able to enjoy that activity if we had not planned (for decades) on how are retirement would look when we finally got there. We finally got there 7 years ago. I’m glad we planned, and I have no regrets. A close friend of mine when I was working always said ‘ failing to plan was planning to fail’.

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