To avoid the worst retirement mistakes, you have to be realistic about your future plans and think ahead. Unfortunately, it's all too easy to make the wrong financial moves when preparing for retirement. According to the Federal Reserve, 36% of non-retired adults believe their retirement savings are on track. But none of the 44% who say their savings are not on track—or the remaining 20% who are unsure—likely set out to sabotage their retirement. Start (or continue) your journey by sidestepping these 11 financial mistakes.

Key Takeaways

  • If you think your retirement savings aren't on track, start to make changes while you are still working.
  • Make sure you have a financial plan and are saving right now, as well as taking advantage of an employer's matching contributions to your retirement account.
  • Invest wisely, and if you need advice, find a trusted financial advisor to help you make smart investment choices and keep your portfolio balanced.
  • Keep taxes and penalties in mind if you are considering taking money out of your retirement accounts for other purposes.
  • Pay off your debt and plan for healthcare costs, which are high in retirement. Putting off Social Security until age 70 could help by giving you the maximum benefit possible.

1. Quitting Your Job

The average worker changes jobs about a dozen times during their career. Many do so without realizing they are leaving money on the table in the form of employer contributions to their 401(k) plan, profit-sharing, or stock options. It all has to do with vesting, which means that you don't have full ownership of the funds or stock that your employer "matches" until you have been employed for a set period (often five years).

Don't decide to leave without seeing what your vesting situation is, especially if you're close to the deadline. Consider whether leaving those funds on the table is worth the job change.

2. Not Saving Now

Thanks to compound interest, every dollar you save now will continue growing until you retire. There is no better friend to compound interest than time. The longer your money accumulates, the better. Examples of spend now–save later include remodeling or adding on to a home you will only live in for a few years or financially supporting adult children. (Note: They have longer to recover than you.)

Cut back on expenses and prioritize saving. Most experts suggest at least 10% to 15% of total income should go into retirement savings over your working life.

3. Not Having a Financial Plan

To avoid sabotaging your retirement and running out of money, create a plan that considers your expected lifespan, planned retirement age, retirement location, general health, and the lifestyle you would like to lead before deciding on how much to set aside.

Update your plan on a regular basis as your needs and lifestyle change. Seek the advice of a credentialed financial planner to ensure your plan makes sense for you.

4. Not Maxing Out a Company Match

If your company offers a 401(k), sign up and maximize the amount you contribute to take advantage of the entire employer match if available. If there is no 401(k), take out a traditional or Roth IRA, but realize that you will have to save more since you are not getting matching funds from your employer.

5. Investing Unwisely

Whether it’s a company retirement plan or a traditional, Roth, or self-directed IRA, make smart investment decisions. Some people prefer a self-directed IRA because it gives them more investment options. That’s not a bad decision, provided that you don't risk your savings by investing in “hot tips” from unreliable sources, such as investing everything in bitcoin or other ultra-risky options.

For most people, self-directed investing involves a steep learning curve and the advice of a trusted financial advisor. Paying high fees for poorly performing, actively managed mutual funds is another unwise investing move.

And don't go that route unless you're prepared to truly direct that self-directed IRA, by making sure your investment choices continue to be the right ones. For most people, better options include low-fee exchange-traded funds (ETFs) or index mutual funds. Your 401(k)-plan sponsor is required to send you an annual disclosure outlining fees and the impact those fees have on your return. Be sure to read it.

6. Not Rebalancing Your Portfolio

Rebalance your portfolio quarterly or annually to maintain the asset mix you want as market conditions change or as you approach retirement. The closer you are to you last day of work, the more you will likely want to scale back your exposure to equities while increasing the percentage of bonds in your portfolio.

7. Poor Tax Planning

If you believe your tax bracket will be higher in retirement than during your working years, it may make sense to invest in a Roth 401(k) or Roth IRA, as you will pay taxes on the front end and all withdrawals will be tax-free. (What's more, you won't pay taxes not just on your investments, but on all the money those investments have earned.)

On the other hand, if you think your taxes will be lower in retirement, a traditional IRA or 401(k) is better since you avoid high taxes on the front end and pay them when you withdraw. Taking a loan from your regular 401(k) could result in double taxation on the borrowed funds since you must repay the loan with after-tax dollars and your withdrawals in retirement will also be taxed.

8. Cashing Out Savings

If you cash out all or part of your retirement fund before age 59½, your plan sponsor will withhold 20% for penalties and taxes, so you won’t receive the full amount. You will lose future earnings since most people never catch back up.

Other issues to watch:

  • Leave less than $5,000 in a company account when changing jobs without specifying treatment and the plan can open an IRA for you. That can result in high fees that could lower the balance of your savings.
  • If you take money out to roll it over to another qualified retirement account, you have 60 days to do so before taxes and penalties kick in. Request a direct rollover or trustee-to-trustee transfer to eliminate the 60-day rule.

To help cover healthcare costs in retirement, increase your savings in tax-advantaged accounts such as a health savings account (HSA), which lets you pay for qualified healthcare expenditures in retirement tax-free.

9. Driving Up Debt

Driving up debt ahead of retirement could have a negative effect on your savings. Have an emergency fund to avoid last-minute debt or drawing down your retirement savings. Pay off (or at least pay down) debt before you retire. On the other hand, experts caution you should not stop saving for retirement to pay off debt. Find a way to do both.

10. Not Planning for Health Costs

According to Fidelity, the average couple will spend $285,000 on healthcare in retirement (not counting long-term care). Stay healthy to lower that figure. Keep in mind that Medicare only covers about 80% of retirement healthcare costs. Plan to purchase supplemental insurance or be prepared to pay the difference out of pocket.

11. Taking Social Security Early

The longer you wait to file for Social Security, the higher your benefit will be (up to age 70). You can file as early as age 62, but full retirement occurs at 66 or 67, depending on your birth year. If you can hold off, it’s best to wait until age 70 to file to receive maximum benefits. 

The only time this does not make sense is if you are in poor health. Another consideration: If if spousal benefits are an issue, it may be better to file at full retirement age so that your spouse can also file and receive benefits under your account.

The Bottom Line

No matter where you are on the retirement continuum, you have likely made mistakes along the way. If you don’t have enough saved, try to save more starting now. Take on a part-time job and put that money into your retirement account. Dedicate any raise or bonus to your investment fund. In addition to avoiding the problem areas above, seek advice from a trusted financial adviser to help you stay—or get back—on track.