Planning for retirement can be overwhelming, and even small missteps can have a lasting impact. Here are the top 5 mistakes people make when preparing for retirement.

1. Starting Too Late

You would be surprised how often I hear the line “I’ll consider things more when I’m about to retire”. I’m not going to beat around the bush here - this is incredibly naïve - and it is these people who usually miss huge opportunities that costs them tens of thousands of dollars. I know this to be true because I see it in my day to day work.

I’m not sure why people put it off for so long but I can assure you that your retirement is probably going to be a 20 to 30 year proposition, so you should not be planning for it 5 minutes before you’re due to retire.

You should be starting as early as possible, and once you’re over 50, you should be well and truly starting to put strategies in place so that you know what the plan is for the next decade or so leading up to retirement.

Make sure you write down what you want your retirement to look like, and how much this might cost. Then understand exactly where you are today, and from here you can work out what level of wealth you need to target by retirement.

Naturally there is a bit of knowledge and expertise required to piece everything together, but there are really no excuses - you can use resources like Retire School or hire an adviser if you prefer a ‘done for you’ approach. Either way, I encourage you to start today.

2. Underestimating Retirement Costs

Many people assume that expenses will drop drastically in retirement. However, things like travel costs are often high in the first 10 – 15 years. You may even want to gift monies to children or upgrade your lifestyle assets such as new cars, boats, caravans etc. Healthcare costs also tend to increase as you get older too.

You can avoid any surprises by creating a detailed retirement budget that includes healthcare, housing, hobbies, and expected capital expenses. As an adviser, I also recommend my clients build up a buffer of at least 3 months living costs for unexpected expenses.

You should also plan for inflation – remember a dollar today might only be worth $0.73 in 10 years. That’s a drop of over 25% in purchasing power! This is where a financial adviser can deliver a lot of comfort to people, because the financially modelling software they use is very detailed.

As a starting point, I encourage you to go through the process of writing down what your living costs are today and then add some expenses for things like holidays.

3. Taking on Too Much Investment Risk

When it comes to portfolio construction, I sometimes have to talk people down from taking too much risk. I think the main reason for this is because most people do not fully understand the concept of ‘risk adjusted returns’. This is something that Retire School’s course covers in deep detail, as well as showing you exactly how you should construct an investment portfolio for retirement, so be sure to check that out.

In a nutshell, during retirement there is no point taking a 10/10 level of risk to achieve a 20% return, when you could instead take a 6/10 risk and still get a 14% return. The basic point here is that the risk is 40% less but the return is only 30% less in the latter scenario. So, on a risk adjusted basis the 12% return is better.

Not understanding this concept is precisely why so many people lost so much money in the GFC, including many advised people - yes, some advisers back then did not seem to understand this concept either.

This mistake leads to what’s known as sequencing risk, which is simply the timing of a market crash aligning with when you need to draw down on assets to fund your lifestyle. This leads to your portfolio never recovering.

I consider the structuring of portfolios for retirees as more of an ‘investor psychology tool’, because the reason people sell during market crashes like the GFC or the COVID Crash is often due to fear - fear that their retirement wealth will be gone tomorrow and destroy their plans for the next 30 years.

If you structure your portfolio correctly, you will never lose sleep at night.

4. Not allowing for Longevity Risk

With advancements in health care, we are all living longer. So, underestimating how long you might live and your retirement wealth running out is a real concern.

As a retirement specialist, I sometimes see this play out in real time. For example, a client in their 70’s who is down to their last years’ worth of money because they spent too much in their earlier years thinking they were going to die sooner. This client was ignoring the fact that people are living much longer these days.

You only need to Google the Australian Bureau of Statistics life expectancy tables to see what the average life expectancy is for your gender and age. And if you pay attention to these statistics, you'll notice a peculiarity - which is that the longer you live, then the greater the chance are that you’ll live longer.

Ok, I can hear some of you saying “what does that even mean, Wayne?”. Well, as an example, if you look at the life expectancy of a female who is 60 years old, you’ll find that she should live for about 27 more years, so there is a high probability she’ll live to 87 years of age.

However, if you look at a female who is already 87 today, then her life expectancy is 6 years – meaning that it is probable she’ll live to age 93. This is likely due to the fact that these people are already healthier than the average person but also due to the aforementioned health care advancements.

Life expectancy is so important in determining how much wealth you'll need for retirement that I coded an additional formula directly into Retire School’s Wealth Target Calculator. The reason I decided to do this is because I noticed that other free alternatives not only rely on you to know what your life expectancy is (as well as a number of other variables), but they also require you to use multiple calculators to arrive at an answer - which, being completely honest, I think is asking a bit much of the average person who does not understand finance, let alone statistics! As a result, I suspect that many people are coming to unreasonable conclusions regarding the level of retirement wealth they'll need, because they are inadvertently fudging the figures.

If you want to check out our Wealth Target Calculator, you can access it via our free course offerings.

5. Neglecting your Estate Planning

Last but not least, neglecting to set up an estate plan is of utmost importance. Not doing so can lead to disputes and unintended outcomes.

Simple things like having an up to date Will, Powers of Attorney, Advanced Care Directives and Binding Nominations on your super accounts will go a long way towards ensuring that your estate is distributed according to your wishes.

Testamentary trusts are also popular in particular circumstances and can be very useful when trying to minimise taxes on the family wealth. They can also be used for beneficiaries where you have concerns over them not being able to manage their inheritance properly due to their age, substance abuse issues, poor spending habits or even certain conditions that you wish to place on them before receiving their inheritance – like attaining a certain level of education for example.

Other considerations such as investment bonds and life interests can also be useful for those couples who have met later in life and/or have blended family situations.

I stress that this is not an area you should be setting up by yourself. I always recommend that my clients see an estate planning solicitor, as well as a financial adviser who can tie your finances and estate plan together, especially when things are not straight forward.

In conclusion, by avoiding these common retirement planning pitfalls, you can create a robust retirement plan that aligns with your goals and provides peace of mind.

Until next time, all the best.

Wayne

Founder of Retire School