Avoid These Retirement Planning Mistakes: Overestimating and Underestimating

Retirement planning is full of estimates. How much will your investments grow? How much will you spend? When will you retire? How much will inflation increase your expenses? How long will you live? What will happen to your pension or government benefits?

The problem isn't that these questions are difficult. The problem is that a retirement plan can look very different depending on the assumptions you put into it.

Overestimate your resources and you may retire with too little money. Underestimate your resources and you may work longer than necessary or spend less than you safely could.

A good retirement plan therefore isn't built around one perfect prediction. It is built around reasonable assumptions and tested against different possibilities.

1. Overestimating Your Retirement Income

One of the most common retirement planning mistakes is assuming that future income or investment growth will be higher than it actually turns out to be. A plan can look comfortable when everything goes right and become much less comfortable when even one assumption changes.

Assuming Investment Returns Will Always Be Strong

Investment returns are uncertain. A retirement plan that assumes a constant high return every year can create a false sense of security.

Even if an investment portfolio produces a reasonable long-term average return, the actual path can include years of significant losses. This is particularly important during the first years of retirement because withdrawals made after a market decline can permanently reduce the amount of capital available for future growth.

Instead of asking, "What return will I earn?" consider testing several reasonable return assumptions and seeing how your retirement plan responds.

Forgetting Taxes

The amount in an investment account isn't necessarily the amount you can spend. Depending on the account and country, withdrawals may create taxable income.

In Canada, for example, retirement income can come from CPP, OAS, employer pensions, RRSPs, RRIFs, TFSAs and other investments. These sources do not all receive identical tax treatment. In the United States, traditional retirement accounts generally produce taxable income when amounts are distributed, while Roth accounts have different rules.

A retirement plan should therefore focus on after-tax spending power, not simply the size of an investment portfolio.

Ignoring Inflation

Inflation is one of the easiest assumptions to overlook because the effect is gradual. But over a retirement lasting 20, 30 or even 40 years, inflation can have a major impact on purchasing power.

Canada's Financial Consumer Agency of Canada illustrates the effect with a simple example: if inflation averaged 2.5% annually, maintaining the purchasing power of $50,000 today would require about $81,900 twenty years from now.

Inflation also doesn't affect every expense equally. Housing, healthcare, travel, insurance and other expenses can behave differently from the overall consumer price index.

Assuming Your Home Will Always Increase in Value

Home equity can be an important part of a retirement strategy, particularly for homeowners who expect to downsize later in life. But it should be treated as an asset with uncertainty rather than a guaranteed source of future cash.

If your retirement plan depends on selling your home, test different future selling prices and consider what happens if the property takes longer to sell, transaction costs are higher than expected, or you decide you don't want to move.

Assuming You Will Work in Retirement

Working part-time can be an excellent retirement strategy. It can provide income, keep you socially active and allow your investments to remain invested longer.

But employment income should be treated carefully in a retirement projection. Your ability to work can change because of health, family responsibilities, employer decisions or simply because you decide that you no longer want to work.

If your retirement plan only works because you expect to earn another $20,000 every year for ten years, run the plan without that income as well.

Assuming You Must Work Until a Particular Age

Overestimating future income isn't the only problem. Some people make the opposite mistake by assuming they need to work until a predetermined age without testing whether their financial position might allow an earlier retirement.

A retirement plan should answer more than "Can I retire at 65?" It should also help you understand what changes if you retire at 60, 62, 65, 67 or another age.

2. Underestimating Your Retirement Expenses

The other side of retirement planning is underestimating how much you will actually spend.

This can produce a retirement plan that looks extremely safe because the spending target is unrealistically low. The result may be unnecessary financial anxiety, reduced travel and entertainment, or delaying retirement when you could potentially afford to stop working.

Assuming Retirement Will Automatically Be Cheap

Some expenses may decline when you stop working. You may spend less on commuting, work clothing or other employment-related costs.

But other expenses can increase. Retirement can create more time for travel, hobbies, dining, home improvements, recreation and visiting family.

This is one reason it can be useful to think about retirement in phases rather than using one spending number for every year.

Ignoring the Early Years of Retirement

The first years after leaving work can be very different from later retirement. You may have more energy and more time for the activities you've been postponing.

Retirementize refers to these phases as Go-Go, Slow-Go and No-Go. The idea is simple: spending patterns can change as your lifestyle and needs change.

Instead of assuming that you will spend exactly the same amount every year, consider building a retirement budget around the lifestyle you actually want.

Forgetting Healthcare and Long-Term Care

Healthcare costs deserve their own line in a retirement plan.

The exact risks depend heavily on where you live and what coverage you have. Government healthcare programs may cover many services without covering every possible expense. Prescription drugs, dental care, vision care, home modifications, private services and long-term care can create additional costs.

Don't assume that your current healthcare spending will remain unchanged throughout retirement.

Underestimating Housing Costs

Paying off a mortgage can significantly change retirement expenses, but owning a home does not make housing free.

Property taxes, insurance, utilities, maintenance, repairs and major replacements can continue for decades.

A good retirement budget should include an allowance for irregular expenses, not just monthly bills.

Ignoring Taxes on Retirement Income

Tax planning doesn't stop when you retire.

The timing and source of withdrawals can affect your after-tax income. In Canada, for example, retirement income may come from a combination of CPP, OAS, employer pensions, RRSP/RRIF withdrawals and other investments. Some types of income may also interact with income-tested benefits.

In the United States, Social Security, pensions, traditional retirement accounts and other income sources can similarly have different tax consequences.

Your retirement plan should therefore model taxes rather than treating every dollar of gross income as spendable cash.

Failing to Consider Inflation by Expense Category

Applying one inflation assumption to everything is convenient, but it may not reflect how your actual expenses behave.

A retiree who spends heavily on travel may experience a very different personal inflation rate from someone whose largest expenses are property taxes and healthcare.

At minimum, identify the expenses that could have the biggest impact on your retirement plan and test what happens if they rise faster than expected.

Ignoring Tax-Advantaged Accounts

The account in which you hold your retirement savings matters.

Canadians may use accounts such as RRSPs and TFSAs alongside non-registered investments and pensions. Americans may use IRAs, 401(k)s, Roth accounts and taxable investments.

The objective isn't necessarily to maximize one particular account. It is to understand how the different accounts work together and how withdrawals from each can affect your taxes and retirement income.

Underestimating How Long Retirement Could Last

Longevity is one of the most important variables in retirement planning. Someone who retires at 60 could potentially need their retirement assets to last for several decades.

For example, U.S. Social Security data currently shows that people reaching age 65 in 2026 have average remaining life expectancies of about 84.2 years for men and 86.8 years for women. Individual lifespans can be substantially shorter or longer than these averages.

A retirement plan should therefore be tested beyond average life expectancy, especially if running out of money late in life would be a serious concern.

3. Don't Confuse Retirement Age With Benefit-Claiming Age

Another common mistake is treating the age you stop working as automatically being the age you start receiving every retirement benefit.

These decisions can be separate.

In Canada, CPP can generally begin as early as age 60, while OAS can begin at age 65. OAS can be delayed to age 70, with the monthly payment increasing for each month of deferral after 65.

In the United States, Social Security retirement benefits can begin as early as 62. Full retirement age depends on birth year, and delaying benefits beyond full retirement age can increase the monthly benefit up to age 70.

The important planning lesson is that retirement timing and benefit timing are separate decisions. A retirement model should allow you to test both.

4. Stress-Test Your Retirement Plan

A retirement plan becomes much more useful when you stop asking whether one specific forecast will come true and start asking how your plan behaves when circumstances change.

Here are some scenarios worth testing.

Higher Inflation

What happens if inflation is higher than your base assumption for several years?

Test the effect on groceries, housing, travel, healthcare and other major expenses rather than simply changing one number.

Lower Investment Returns

What happens if your portfolio earns substantially less than expected?

A useful stress test might include a period of weak returns early in retirement as well as a lower long-term return assumption.

A Major Market Decline

Average returns don't tell the entire story. The sequence of returns can matter when you are withdrawing money from your portfolio.

Test what happens if a significant market decline occurs during your first few years of retirement.

One Spouse Dies Earlier Than Expected

Couples should understand what happens financially if one spouse dies.

Survivor benefits, pension reductions, insurance, government benefits, taxes, housing expenses and spending patterns can all change.

A retirement plan that works comfortably for two people may look very different for one survivor.

Long-Term Care Is Required

What happens if you eventually need professional home care or residential long-term care?

You don't need to predict exactly when this will happen. Instead, model a potential large expense and determine whether your retirement plan can absorb it.

Your Home Is Worth Less Than Expected

If downsizing or selling your home is part of your retirement strategy, test a lower selling price.

Also test what happens if you decide not to sell at all.

A Major Emergency Expense

Retirement plans should have room for unexpected expenses.

A new roof, major vehicle repair, home renovation, family emergency or other large expense can quickly disrupt a carefully balanced retirement budget.

Divorce or Separation

Nobody wants to plan for this scenario, but couples who are relying on shared assets and income should understand how the plan changes if the household finances are separated.

Children Stay Home Longer

Adult children sometimes remain in the family home longer than their parents expected. That can affect housing decisions, household spending and the timing of downsizing.

If this is relevant to your family, consider building the additional expense into your retirement scenarios rather than assuming your children will move out on a particular schedule.

You can read more about this topic in our article Adult Kids Are Staying Home Longer.

5. Build a Retirement Plan With Ranges, Not Just One Number

One of the biggest improvements you can make to retirement planning is to stop looking for a single magic number.

Instead of saying:

"I need exactly $1.2 million to retire."

consider questions such as:

• What happens if investment returns are lower?
• What happens if I live longer?
• What happens if inflation is higher?
• What happens if I spend more during the first decade of retirement?
• What happens if I retire five years earlier?
• What happens if I work part-time for several years?
• What happens if my home is worth less than expected?
• What happens if one spouse dies earlier?
• What happens if I need significant care later in life?

These scenarios provide much more useful information than a single projection based on assumptions that may never happen exactly as predicted.

6. Common Retirement Planning Mistakes at a Glance

• Overestimating investment returns — assuming markets will consistently deliver high returns.
• Underestimating taxes — treating account balances as if every dollar were available to spend.
• Ignoring inflation — assuming today's spending will remain sufficient decades from now.
• Underestimating spending — forgetting that retirement may create more time for travel and activities.
• Relying too heavily on home equity — assuming a future sale will happen at a particular price.
• Counting on employment income — assuming you will continue working regardless of circumstances.
• Ignoring healthcare costs — failing to account for potentially significant later-life expenses.
• Underestimating longevity — planning only to average life expectancy.
• Using one spending level for life — failing to recognize that retirement spending can change over time.
• Failing to stress-test the plan — checking only the optimistic scenario.

7. How to Improve Your Retirement Plan

You don't need to predict the future perfectly. Instead, focus on making your assumptions visible and testing the decisions that matter most.

1. Estimate your actual retirement spending. Start with your current budget and adjust it for the expenses you expect to disappear or increase.
2. Separate essential and discretionary spending. This makes it easier to understand what could be reduced during difficult market conditions.
3. List every source of retirement income. Include government benefits, pensions, investment accounts, employment income and other expected income.
4. Model taxes. Gross income and spendable income are not necessarily the same.
5. Use realistic investment assumptions. Don't build your entire retirement around unusually strong market returns.
6. Model inflation. Pay particular attention to expenses that could rise faster than your overall inflation assumption.
7. Test different retirement ages. Compare the financial consequences of retiring earlier or later.
8. Stress-test major risks. Include market declines, higher inflation, major expenses, longevity and changes in household income.
9. Review the plan regularly. Your retirement plan should change as your savings, expenses, investments and circumstances change.

Conclusion: Balance Is the Goal

Retirement planning isn't about predicting exactly what will happen over the next 30 years. Nobody can do that reliably.

It is about creating a plan that remains workable when reality differs from your expectations.

Avoiding retirement planning mistakes means looking carefully at both sides of the equation. Don't overestimate investment returns, home values or future employment income. But don't underestimate your spending, longevity, healthcare needs or the lifestyle you want to enjoy.

Most importantly, don't test only the scenario where everything goes according to plan.

Test the bad years, the expensive years, the long retirement and the unexpected events. That's where a retirement plan proves its value.

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