4 Common Retirement Planning Mistakes

If you hope to maintain your current lifestyle after you stop working, it pays to avoid these common retirement planning mistakes.

Mistake #1: Starting too late.

One of the most common retirement planning mistakes is simply a matter of timing. The earlier a person starts planning for retirement the better --compound interest puts time on the side of the saver. Saving a little money 30 years in advance of retirement is often worth more than saving a lot in the last 10 years before retirement.

Thus, one major mistake is starting to save for retirement too late. A common reason for not saving for retirement is believing that retirement savings are not affordable. But saving a small amount each year a person is employed in their 20s, for example, will put that person in a much better position when they are older.

In addition, when a person starts saving for retirement decades in advance, that person has the advantage of being able to pick more volatile investments like common stocks that typically return more in the long run than safer fixed income investments. If a person only starts saving a few years before retirement, volatile investments like stocks may not be wise because the investor may be forced to sell them at a low price.

Mistake #2: Thinking it's too late to start.

Although this might sound like a contradiction of the first point, it's not. It's never too late to start, and believing it's too late to start is a serious mistake that someone planning for retirement should not make.

While it's always better to start early -- many years before retirement -- a person who begins saving only a few years before retirement can still make a big difference to their post-retirement lifestyle. A few years of serious savings can add up dramatically and even make retirement possible for a person who had no retirement savings before embarking on a "crash retirement plan."

In addition, the federal tax code allows people close to retirement age to make additional retirement contributions to “catch up;” there is no reason to ignore these benefits just because a person has little retirement savings to date.

Mistake #3: Believing Social Security will be enough.

One very common mistake is believing that Social Security will provide enough for retirement. After all, you've been paying into the Social Security system for years, why wouldn't it provide for your retirement?

The truth is that unless you plan on having a very low standard of living during retirement or can live incredibly cheaply, most people will suffer a severe loss of income if they rely on Social Security to provide for their retirement.

The maximum monthly benefits change from year to year, but for many people, especially those with a mortgage, their Social Security benefits will not be nearly enough for a pleasant retirement. In any case, a person relying on Social Security alone will suffer a substantial drop in monthly income that will lead to hard lifestyle choices.

In short, Social Security benefits will not be enough for most people, and additional retirement planning is necessary.

Mistake #4: Not having a plan.

The single most dangerous retirement planning mistake is not having a plan at all. A retirement planner can help a person of any age set goals for retirement, and then set savings goals to get there. Internet retirement planners can help provide basic guidance.

At a minimum, people should plan for retirement by calculating how much income they will need in retirement. The next step is to calculate how much savings they need to be able to draw that level of income in retirement.

There are several important assumptions that have to be made to make this calculation. One assumption investors should be very sensitive to is the average rate of return on their savings. This assumption has a huge effect on the expected monthly savings required. It could also have a huge effect on whether a person has enough money for retirement.

If the assumed rate of return is higher than the investor's actual rate of return, the investor will have less money than expected in retirement. Investors should beware that using an overlay optimistic figure will harm them in the long run. In particular, investors should not assume a long-term rate of return of more than 8 percent. A conservative investor should use 6.5 percent or less to ensure that he or she is saving enough for retirement.