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15 Retirement Mistakes That Will Ruin Your Retirement

Who doesn't look forward to retirement? The fantasy of being your own boss and filling your days as you wish is a powerful one. But if you're not careful, you could spend those golden years trying to earn more or pinching every penny. Make sure you avoid these common savings missteps.

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Withdrawing early from retirement accounts

Your 401(k) is not a checking account. You can withdraw from it, but it should only be done in emergencies when all other options are exhausted. You will get hit with taxes and penalties if you withdraw from a 401(k) before age 59 and a half. "It could cost you at least 25 percent of what you withdraw, not to mention you will need that money later," warns Matthew Peck, a certified financial planner and co-founder of SHP Financial. "Every dollar you take out of your 401(k) early will cost you $10 to $20 in lost future retirement income. Leave the money alone so it's there when you need it," he says. Here's the perfect retirement age (it's not 65).

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Not planning for long-term care

Long-term care poses one of the biggest threats to your nest egg. "One year in an assisted living facility is an average of $43,200, and a nursing home is nearly twice as expensive," says Peck. "Medicare and health insurance plans do not cover long-term care. Consider getting long-term care insurance."

Long-term care insurance helps pay for adult day care, respite care, stays in Alzheimer's special care facilities, assisted living facilities, nursing homes, and hospices. Long-term care insurance also typically pays for in-home care like skilled nursing, rehabilitation therapy, and personal care like bathing and dressing. Some employers offer long-term care insurance as part of their benefits package. However, those are the exception, not the rule. Smart people do these things when preparing for end-of-life plans.

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Investing too aggressively a few years before retirement

It's important not to take on too much risk when retirement is just a couple of years away. "Losing a big chunk of your net worth right before retirement could be a detriment to your plan," warns Zachary Welborn, a financial advisor with Manske Wealth Management. Unlike in your 30s, you won't have a lot of time to make up the losses.

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Underestimating your lifespan

The good news is you might live much longer than you think. The bad news is, you might need more money than you think. When it comes to retirement planning, many people fail to accurately factor in a realistic life expectancy. If you have saved up for 70 years of life and end up making it to 85, that extra time will be a big financial squeeze.

"To avoid this, begin by putting together a retirement budget in which you detail the expenses you currently incur as well as the ones you expect to incur in retirement. This is for reference and can help you begin to ballpark your needs. There are also other investment options that can provide you a regular stream of income in retirement, like annuities, which can issue regular payments throughout your life," says Douglas Keller, who runs the Peak Personal Finance blog.

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Prioritizing other things over retirement savings

It's easy to look up and find yourself being pulled in different financial directions. It may get to the point where you're saving up for a kitchen remodel, paying off debt, and putting together a fund for your children's education all at the same time. With so many balls in the air, it's easy to take your sights off the retirement target.

That's a mistake. "The longer you put it off, the more you undermine the most important component of retirement saving, which is the compounding effect that it has on your money. Done correctly, retirement saving does not require an incredibly large upfront investment—it just needs time to build. As a result, every day, month, and year of saving becomes significant when thinking about the implications it will have on your future," says Keller. Don't miss these 13 retirement facts you need to take seriously.

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Not being properly diversified

You'll need many types of investments—and the right mix of them—to achieve your goals. Says Welborn, "Having the proper asset allocation can reduce the overall risk of your portfolio leading up to retirement. Furthermore, having a focus on fixed income and value-oriented equities will help supplement other sources of income such as social security and pensions."

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Being too conservative

While you don't want to fully embrace risky investments, you can't rely too heavily either on conservative ones either, warns Eric Meermann, a certified financial planner and vice president at Palisades Hudson Financial Group. "Sometimes seniors are far too conservative with their investment portfolios. They think because they are retired, they should be almost totally invested in CDs and cash-like investments, drawing down the principal over time. The flaw with this strategy is inflation. Inflation erodes the purchasing power of the dollar."

It is important to add equities—at least 20 percent—to a portfolio to provide growth potential. "For a person retiring at 65, with a life expectancy to 87, 22 years is a long time for your money to last with no growth. It is best to take on some risk, to provide growth to protect against outliving your assets," says Meermann. Find out the other common mistakes you need to avoid in retirement.

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Being overly committed to supporting adult children

You have to know when to cut the cord financially. "When it comes to helping children in need, I see far too many people putting themselves at risk because they do not think about the range of outcomes of their decision," says Justin Stevens, president, O'Keefe Stevens Advisory.

What's his advice? "Incorporate adult children into the retirement planning process. This helps them understand their parents' limitations in providing financial assistance and reduces the likelihood that mom or dad will be moving in the children's homes in the future."

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Underestimating the cost of healthcare

In a recent study, Fidelity Investments projected that a healthy couple can expect to spend in excess of $275,000 on healthcare in retirement. "When calculating future income needs, be cognizant that medical costs will probably rise at a rate greater than the published CPI," says Joseph Bert, a certified financial planner and founder of Certified Financial Group.

So, how can you prepare for health risks? Utilize a Health Savings Account (HSA). "You can also set aside an emergency fund in a protected position – a savings account, a bank-issued CD, or an insurance contract," says Edward Petersmarck, executive director of practice development at M&O Marketing, a financial marketing organization. Here are the other things that can sabotage your retirement.

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Getting emotional about the market

Maintain a level head. "It's problematic when people allow emotions to sway them into taking their money out of investments. Whether it is a national tragedy or just a down day for the markets, people will panic and call their investment professional to pull their money. At this point, the loss that you believe you have incurred becomes real and you have just prevented yourself from realizing any gains from the investment," says Keller. The market follows cyclical trends—typically for every low, there will be a corresponding high. Patience will allow you to come out on top. Here's a timeline that can help guide your retirement saving.

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Ignoring the impact of state income tax and high property tax rates

With the new tax code, many people will lose itemized deductions or be limited by what they can deduct. For example, new mortgages will have a $750,000 limit on interest deductions, and the SALT limit (includes real estate taxes) is $10,000. "No longer having those deductions may mean spending less in retirement or postponing retirement in order to not outlive the assets," says Kathleen Grace, a managing director at United Capital.

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Lack of familiarity with Social Security claiming strategies

Social Security isn't something you want to guess about. Says Grace, "Many people forgo hiring a financial planner who can help determine an appropriate retirement date, taking into consideration the optimal Social Security claiming strategy for their particular situation. In other words, many retire too early and risk running out of money or having to go back to work in retirement."

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Carrying debt into retirement

Get rid of as much baggage as you can before you say goodbye to the 9 to 5. Says Peck, "Carrying debt into retirement can leave you financially vulnerable because you are on a fixed income and have less money to cover unexpected expenses. And more and more Americans are doing it. The amount of debt held by people between the ages of 50 and 80 has increased by about 60 percent over the last 12 years." Watch out for these kinds of costly retirement budgeting mistakes.

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Failing to create a realistic budget

The number one mistake is not having a realistic budget in place for your retirement years before you make the decision to quit your job. Your budget will change after you stop working full time. For example, your daily expenses for eating meals out, commuting, dry cleaning, etc. will most likely decrease. However, if you plan to travel, then you need to include these new expenses in your monthly budget.

Once you have a realistic budget for retirement in place, make sure you have an adequate cash flow to cover your monthly expenses before you actually retire. If not, you may need to work a little longer to save more money and/or figure out how to reduce your monthly expenses.

Emily Stroud, owner and manager of investment firm Stroud Financial Management, offers advice, "I always recommend that my pre-retiree clients practice living on their revised budget for a year before they actually quit working. This exercise will allow them time to tweak their budget if needed before officially retiring."

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Waiting to save

Don't delay contributing to a retirement plan. Says Lou Cannataro, partner, Cannataro Park Avenue Financial, "Time is your biggest ally until it becomes your biggest enemy when it comes to investing. Start early and crank it up as soon and as fast as you can up to the IRS maximums. Someone who starts 10 years earlier saving for retirement can have twice as much by age 65." Next, find out the retirement planning steps you need to take before you turn 50.