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3 Costly Retirement Mistakes to Avoid

Selena Maranjian, The Motley Fool

Some mistakes, like ordering pizza at a barbeque joint, are regrettable -- but relatively inconsequential. Bigger mistakes like those related to your retirement, can be very costly.

Here's a look at three costly retirement mistakes that many people make. Learning about them can help you avoid these pricey pitfalls.

Yellow police tape is criss-crossed across the image, with the word warning printed repeatedly on it.

Image source: Getty Images.

Mistake No. 1: Underestimating your life span

For starters, many people underestimate how long they'll live -- and many people save for retirement without ever thinking about their life span. That's a mistake, because the money you're socking away will need to support you throughout your retirement, so for planning purposes, you need an idea of how long that will be.

The average age when people retire these days is around 61, according to Gallup. Retiring at this age would give a typical retiree 20 years of retirement, until dying near age 81. Of course, that's just an average. While many people will die younger than 81, many others will die at an older age. An increasing number of Americans are even making it to age 100.

Here are the chances of living to various ages from Vanguard, which uses data from the Society of Actuaries:

 

Chance of Living to 85

Chance of Living to 90

Chance of Living to 95

Chance of Living to 100

61-year-old man

40%

19%

6%

1%

61-year-old woman

51%

31%

13%

4%

61-year-old man and woman*

71%

44%

18%

5%

61-year-old man and man*

63%

34%

11%

2%

61-year-old woman and woman*

76%

52%

24%

8%

Source: Vanguard calculator. 
*The figures for the couples reflect the chance of either of them reaching that age.

If you're in a heterosexual marriage, there's a 1-in-20 chance that one of you will live to age 100 -- which would mean that your retirement coffers would have to support you for a whopping 39 years!

Mistake No. 2: Not saving enough for retirement

Given how long you might live, there's a good chance that you're not saving enough for your retirement. But millions of Americans have saved so little that they won't even have enough to support them comfortably for a shorter-than-average retirement:

Amount Saved for Retirement

Workers, Aged 55+

Less than $1,000

19%

$1,000 to $9,999

6%

$10,000 to $24,999

3%

$25,000 to $49,999

7%

$50,000 to $99,999

8%

$100,000 to $249,999

19%

$250,000 or more

38%

Source: 2018 Retirement Confidence Survey. 

Let's put those numbers into perspective, using the "4% rule." It suggests that you withdraw 4% of your nest egg in your first year of retirement and then adjust for inflation in subsequent year, a process that's likely (but not guaranteed) to have your money last 30 years. If you have a $250,000 nest egg, that will give you $10,000 in income in your first year of retirement. Clearly, that won't be sufficient to live on, so you'll need to boost your savings or draw income from other sources, or a combination of both.

The below table uses the 4% rule to show how much income you can collect froma sum of personal savings, to give you an idea of a nest egg size to shoot for:

Nest Egg

4% First-Year Withdrawal

$300,000

$12,000

$400,000

$16,000

$500,000

$20,000

$600,000

$24,000

$750,000

$30,000

$1 million

$40,000

Source: Author calculations.

Mistake No. 3: Not being smart about Social Security

Finally, there's the federal Social Security program. Even if you've been saving aggressively and you've amassed a sizable war chest in your retirement accounts, you can still make a costly error -- leaving Social Security dollars on the table.

Deciding when to start receiving your benefits is key. You can start claiming your benefits as early as age 62 and as late as age 70. There's a catch, though: For every year beyond your full retirement age (FRA), which is 66 or 67 depending on your birth year, that you delay starting to receive benefits, the value of your future checks is increased by about 8% -- until the bonus for delaying maxes out at age 70.

So delaying claiming your Social Security benefits can mean up to 24% fatter checks. Meanwhile, if you start collecting early, your benefits are reduced by up to 30%. The below table shows how much of your full benefits you'll receive by starting to collect at various ages:

Start Collecting at:

Full Retirement Age of 66 

Full Retirement Age of 67 

62

75%

70%

63

80%

75%

64

86.7%

80%

65

93.3%

86.7%

66

100%

93.3%

67

108%

100%

68

116%

108%

69

124%

116%

70

132%

124%

Source: Social Security Administration. 

Delaying until age 70 isn't necessarily the best move, because the system is designed so people with average life spans will receive the same amount in total benefits no matter when they start collecting. After all, while checks that start arriving at age 62 will be smaller, you'll receive many more of them over the rest of your life. Thus, it's not necessarily dumb to start collecting early. Actually, most retirees start collecting at 62. If you can wait, though, and you stand a good chance of living a longer-than-average life, then go ahead and shoot for starting to collect at 70 or as close to it as you can.

If you're married, it's crucial to coordinate Social Security strategies with your spouse. For example, you and your spouse might decide to start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you'll both enjoy some income earlier, and when the higher earner hits 70, you'll both receive significantly more. This way, when one of you dies, the survivor can collect those bigger benefit checks as their own -- even if the survivor had the lower lifetime earnings.

It's worth spending some time reading up on retirement, retirement planning, and retirement strategies, in order to avoid making some costly mistakes.

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