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5 common retirement income planning mistakes to avoid

by Alliance America
November 21, 2023


Retirement is a phase of life that represents a well-deserved break from the grind of work and provides an opportunity to pursue one's passions, travel and spend quality time with loved ones. However, to ensure that retirement truly becomes a golden period, it is crucial to engage in thoughtful and strategic retirement income planning.

Retirement income planning serves as the foundation for a financially secure and fulfilling retirement. It involves creating a roadmap that allows individuals to manage their finances efficiently during their post-work years. A well-executed plan provides peace of mind, ensuring that retirees can maintain their desired standard of living without depleting their savings too quickly or sacrificing essential needs.

Without proper planning, retirees may find themselves facing financial difficulties or being unable to fulfill their dreams and aspirations during retirement. It is important to note that relying solely on government benefits or hoping for a stroke of luck will not suffice in securing financial stability during this phase of life.

In the quest for financial security during retirement, many individuals unknowingly make grave errors that undermine their long-term goals. By recognizing these common mistakes upfront, one can take proactive steps to avoid them and ensure a smoother path toward a secure future. Mistakes in retirement income planning often stem from misconceptions about factors like life expectancy, savings rates, reliance on Social Security benefits, inflation's impact on purchasing power and rising health care costs.

Furthermore, failing to adjust investment strategies as retirement approaches can lead to unnecessary risks or missed opportunities for growth. By exploring each mistake in detail, we can arm ourselves with the knowledge and insights necessary for effective retirement income planning.

By understanding and addressing these potential pitfalls, you can chart a course toward a financially stable and fulfilling retirement.

Mistake No. 1: Underestimating life expectancy

stick figure running on falling dice

Life expectancy has been steadily increasing over the years, thanks to advancements in health care and improved living conditions. Yet, one of the most common mistakes people make when planning for retirement income is underestimating how long they will live. Many individuals tend to base their calculations on outdated assumptions, such as outdated mortality tables or family history, failing to acknowledge the growing trend of longer lifespans.

Underestimating life expectancy can have significant repercussions on retirement savings and income planning. If you assume a shorter lifespan than what reality holds, you risk outliving your nest egg.

This could lead to a situation where your financial resources become depleted at a time when you are most vulnerable and unable to generate additional income due to health or age-related limitations.

Moreover, with increasing life expectancy comes the need for extended periods of financial support during retirement.

Medical expenses tend to rise as we age, potentially draining retirement funds even faster. Failing to account for these increased costs can leave retirees struggling to cover their basic needs and health care expenses later in life.

To avoid underestimating life expectancy in retirement income planning, it is essential to embrace realistic projections based on current trends and data. Start by educating yourself about average life expectancies for your demographic group and consider factors such as gender, lifestyle choices, family history of longevity or health issues.

Once armed with this knowledge, adjust your financial plans accordingly. It's prudent to plan for a longer lifespan than anticipated – perhaps even 10-15 years past average life expectancies – as it's better to be overprepared rather than caught off guard by unexpected longevity.

Additionally, incorporating strategies that account for longer lifespans is crucial. Consider utilizing annuities that offer guaranteed lifetime income, allowing you to receive regular payments throughout your retirement, regardless of how long you live.

Also, implementing a comprehensive health care plan that covers potential medical expenses, including long-term care needs, can help navigate the financial challenges associated with aging. By reframing our understanding of life expectancy and embracing proactive planning measures, we can equip ourselves for extended retirements and ensure our financial security lasts as long as we do.

Mistake No. 2: Failing to save early and consistently

One of the most critical retirement income planning mistakes individuals make is failing to save enough for retirement. Many people underestimate the amount of money they will need to maintain their desired lifestyle during their non-working years. It is crucial to start saving as early as possible to give your investments time to grow and compound over time.

To illustrate the significance of early savings, let's consider two scenarios. In Scenario A, John starts saving for retirement at 25 years old, contributing $500 per month into his retirement account until he reaches 65.

In Scenario B, Sarah waits until she is 40 years old before starting her retirement savings plan and contributes $1,000 per month until she retires at 65. Assuming an annual return rate of 7%, by the time John reaches retirement age, his savings would have grown significantly due to compounding interest.

On the other hand, Sarah would have had less time for her savings to grow even though she was contributing twice as much each month. This example demonstrates that consistent early contributions can often be more valuable than sporadic larger contributions made later in life.

To avoid falling into the trap of inadequate savings, it is essential to accurately determine your retirement savings goals based on your desired lifestyle during retirement. One widely used method is the replacement ratio approach.

This approach suggests that individuals aim to replace a certain percentage of their pre-retirement income during their retirement years. An effective way to estimate your replacement ratio is by considering your current spending habits and potential changes in expenses during retirement.

For instance, if you currently spend $60,000 annually and anticipate lower housing costs or reduced work-related expenses after retiring, you may aim for a replacement ratio of 80% (or $48,000) to maintain a similar lifestyle. However, it is important to note that everyone's retirement goals and financial situations are unique, so personalized calculations are crucial.

If you find yourself falling behind in your retirement savings, there are several strategies you can implement to catch up and ensure a more secure financial future. First, consider increasing your contribution rate to your retirement accounts.

Even small increases can make a significant difference in the long run. Additionally, take advantage of employer-sponsored retirement plans such as 401(k)s or 403(b)s.

If your employer offers matching contributions, make sure you contribute at least enough to maximize the matching amount – it's essentially free money. Remember that these contributions reduce your taxable income as well.

Another effective strategy is automating your savings by setting up automatic transfers from your paycheck or bank account into a separate retirement savings account. By removing the temptation to spend this money elsewhere, you can consistently build up savings without effort or discipline-related challenges.

Mistake No. 3: Relying solely on Social Security benefits

hand holding a social security card

When it comes to retirement income planning, one of the most common mistakes people make is relying solely on Social Security benefits. While Social Security can provide a valuable source of income during retirement, it is important to understand its limitations. Social Security benefits are based on your earnings history and the age at which you choose to start receiving them.

Social Security benefits are calculated using a formula that takes into account your highest 35 years of earnings. The amount you receive each month will depend on your average indexed monthly earnings (AIME) during those years.

However, it's crucial to note that Social Security was never intended to be the sole source of income in retirement. The benefits provided by Social Security generally replace only a portion of pre-retirement income. To have a secure and comfortable retirement, it is essential to diversify your sources of income beyond just relying on Social Security benefits. Diversification helps protect against potential changes in government policies or economic fluctuations that may impact the sustainability of these benefits over time.

There are several options available for individuals who want to supplement their Social Security benefits and create additional streams of retirement income. One option is building a well-diversified investment portfolio that generates regular dividend or interest payments. Another option could be considering part-time work or freelance opportunities during retirement to generate an additional source of income. Additionally, annuities can provide guaranteed lifetime payments, serving as a reliable supplement to the fixed monthly amount received from Social Security.

Mistake No. 4: Ignoring inflation and rising health care costs

Inflation, the gradual increase in the price of goods and services over time, has a significant impact on retirement income planning. Many individuals fail to account for inflation when estimating their future expenses, which can lead to a decline in purchasing power during retirement.

As prices rise, the value of money diminishes over time. To combat this, it is crucial to incorporate inflation into retirement savings goals and adjust investment strategies accordingly.

Health care costs tend to rise faster than general inflation rates, making it a major concern for retirees. People often underestimate the financial burden that healthcare can place on their retirement funds. Expenses related to medical care, prescription drugs, long-term care facilities, and insurance premiums can quickly deplete even substantial savings if not adequately planned for.

Medicare plays a critical role in providing health coverage for many retirees; however, it is essential to understand that it does not cover all health care expenses. Medicare has deductibles, copayments and coverage limitations that can result in potential gaps in coverage. Being aware of these gaps and considering supplemental insurance options like Medigap policies or Medicare Advantage plans can help mitigate health care costs during retirement.

Long-term care is a crucial aspect often overlooked by individuals planning for retirement income. The cost of long-term care services such as assisted living or nursing home care can be substantial. Considering long-term care insurance or other alternatives like self-insuring or setting aside funds specifically earmarked for long-term care expenses should be part of an overall retirement income strategy.

To protect against the erosion of purchasing power due to inflation, retirees could consider investing in assets that historically provide a hedge against inflation, such as stocks, real estate investment trusts (REITs) and Treasury Inflation-Protected Securities (TIPS). Additionally, saving early and consistently can help build a sizable retirement nest egg that can better withstand rising health care costs. Working with a financial professional who specializes in retirement income planning can provide valuable guidance on incorporating inflation and health care costs into an overall retirement income strategy.

Mistake No. 5: Not adjusting investment strategy as you near retirement age

man looking at stock graph on computer screen

As individuals near retirement age, it becomes crucial to reassess their investment strategy. A common mistake is maintaining a growth-oriented investment portfolio without gradually transitioning to more conservative options.

A more prudent strategy would be to focus on the preservation of capital and reposition assets and reduce exposure to market risk. Here are some strategies that can be considered:

  • Asset allocation adjustment. Rebalance your investment portfolio to reduce the percentage of volatile assets like stocks and increase the percentage in more stable investments such as bonds and treasury securities. The precise allocation should consider your risk tolerance, time horizon and financial needs.

  • Diversification. Ensure your investments are spread across various asset classes and sectors to mitigate risk. This means not having all your eggs in one basket, even within conservative asset classes.

  • Fixed-income investments. Consider government and high-quality corporate bonds, which tend to be less risky than stocks. Fixed-income securities provide regular interest payments, which can be a stable source of income.

  • Dividend-paying stocks. If you choose to keep some assets in stocks, consider blue-chip companies with a history of paying and increasing dividends. While still subject to market risk, these companies can offer a potentially lower risk profile than high-growth companies.

  • Annuities. Fixed annuities can provide a steady income stream and can be a way to hedge longevity risk. It's important to thoroughly understand the fees, terms and conditions associated with annuities.

  • Laddered CDs or bonds. A laddering strategy involves buying multiple certificates of deposit (CDs) or bonds with different maturity dates. This can provide a blend of accessibility to funds (as CDs/bonds mature at different times) and protection against interest rate fluctuations.

  • Money market funds. These funds are designed to offer stability and easy access to your money, although they typically provide lower returns. They can be a good place to park money you'll need soon.

  • Life-cycle or target-date funds. These funds automatically adjust their asset allocation mix as you get closer to a target retirement date. They shift towards a more conservative portfolio as the target date approaches.

  • Principal protection funds. These funds are designed to protect the initial investment while still providing some growth potential. They might involve a trade-off with lower expected returns, but they offer a conservative risk profile.

  • Cash reserves. Having a portion of your portfolio in cash or cash equivalents (like a high-yield savings account) can be wise, providing liquidity and a buffer against market downturns.

  • Real estate. For some, owning property (outright or through real estate investment trusts, REITs) can offer both income through rents and potential appreciation in value with relatively low correlation to stock market movements.

  • Health savings accounts (HSAs). If eligible, contributing to an HSA can be a tax-efficient way to save for future medical expenses, which are often a significant part of retirement costs.

  • Risk management through insurance. Consider policies such as long-term care insurance or life insurance to manage risks that could otherwise deplete retirement savings.

  • Debt reduction. Reducing or eliminating debt, especially high-interest debt, can decrease the financial burden and need for higher-risk investments to "out earn" the interest rates on debt.

  • Consulting a financial professional. A financial professional can provide personalized advice considering your unique financial situation, goals and risk tolerance. They can help construct and manage a conservative portfolio aimed at preserving capital.

As retirement approaches, it’s crucial to reassess financial goals, risk tolerance and investment strategies to ensure they align with the need for security and income in retirement. Each of these strategies involves trade-offs and considerations, and a combination of them may be the best approach to achieve a balance between growth, income and preservation of capital.


Retirement income planning is a critical process that requires careful consideration and attention to detail. Failing to account for inflation, rising health care costs, and neglecting necessary adjustments to investment strategies can have significant consequences on one's financial well-being in retirement.

By recognizing these common mistakes and taking proactive steps to address them, individuals can better position themselves for a secure financial future. Remember, seeking professional advice and staying informed about the ever-changing landscape of retirement planning is vital in ensuring a comfortable and confident transition into the golden years of life.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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