Avoid These Retirement Planning Mistakes: Over-Estimates and Under-Estimates

Retirement planning can feel like navigating a maze of numbers, projections, charts, and tables. One wrong assumption, and you could either end up unable to afford the things that make you happy, or discovering you could have retired earlier and afforded more. What is the key to success? Avoiding the common retirement planning mistakes that lead to either over-estimating or under-estimating your needs and available resources, and stress-testing your plan to make sure it is robust enough to withstand challenges. In this post, we break down the most frequent pitfalls and how to avoid them, so you can enjoy a smooth retirement journey.

1. Over-Estimating Your Retirement Income

When people overestimate their retirement income or assets, it can lead to a retirement plan that looks solid on paper but fails in practice. Here are the top mistakes that can inflate your expectations:

Not Stress-Testing Investment Growth: Assuming overly optimistic returns on your investments is a dangerous game. The stock market might be riding high now, but downturns happen, and you need to plan for them. Remember, 2008 wasn't that long ago!
Overlooking Taxes on Withdrawals: Not factoring in taxes on your retirement withdrawals, especially from registered accounts like RRSPs, can lead to an inflated sense of how much money you really have. Tax implications can eat away at what you expect to receive.
Ignoring Inflation: Forgetting to account for inflation (or assuming it's always low) can be a disaster. If you’re planning to live 30 years in retirement, costs could double. In the 1970s, inflation hit 14%—could you handle that?
Assuming Your Home’s Value Will Keep Growing: Many retirees overestimate how much they can sell their homes for in the future. Real estate markets can fluctuate, and it’s risky to assume that property values will always rise.
Overestimating Work Longevity: Planning to work part-time in retirement? While it’s a great idea, many people overestimate their ability to continue working due to health issues or market conditions. Don't bank on that extra income forever.
Expecting to Retire Later than Possible: Some people plan for a retirement age of 70 but forget they might be financially able to retire earlier. Waiting too long could mean missing out on the golden years while still healthy.

These over-estimations may give you false confidence that you’re financially secure when, in reality, you may need to reassess your plan.

2. Under-Estimating Your Retirement Needs

On the flip side, under-estimating what you’ll need in retirement can lead to living too conservatively and missing out on enjoying your retirement to the fullest. These are the common mistakes that lead to low-balling your retirement requirements:

Not Considering Your Home as an Asset: Some retirees don't factor their home into their retirement planning. Whether you plan to downsize or access home equity, your primary residence can play a significant role in your financial outlook.
Under-Estimating Retirement Spending: Thinking you'll need much less in retirement could leave you with an overly tight budget. Many retirees spend more in their early years, especially during the 'Go-Go' phase of travel and adventure. Don’t forget, fun costs money! Check out this budgeting tool to kickstart the planning.
Failing to Take Advantage of Income Splitting: If you're married, income splitting can lower your tax bill significantly. Not factoring this into your planning could mean you're paying more taxes than necessary.
Not Budgeting for Healthcare: While you may have general healthcare coverage, retirees often under-estimate the cost of long-term care or out-of-pocket medical expenses. A significant oversight if unexpected costs arise.
Forgetting to Plan for Inflation in Specific Categories: Sure, inflation on goods like clothing and electronics may be low, but healthcare and travel can increase much faster. Make sure your inflation estimates match your spending patterns.
Not Considering Tax-Free Accounts: If you don’t plan to maximize the benefits of tax-free savings accounts like a TFSA, you could be missing out on potential tax savings. Every dollar you keep tax-free makes a difference.
Under-Estimating Longevity: Many people under-estimate how long they will live. With advances in healthcare, living past 90 is more common than ever. Failing to plan for a long life could leave you scrambling in your later years.
Not Saving Early Enough: This one’s a classic: the later you start saving, the harder it is to catch up. Compounding is your best friend, so the earlier you begin, the better. Yet, a significant number of people push off retirement savings until it's too late.

3. Stress-Test Your Plan

Make sure you test your plan for all the unforseen circumstances or worst-case scenarios. For example, test your plan for:

High-Inflation: On-average, inflation is 2.1%. But as we have recently seen it can go up to high levels between 5% to 10%. Higher-inflation means you need more money to keep the same standard of living, the take home from pensions and social security could be more, and it could mean the value of your home is higher. Testing your plan with inflation numbers that go up to 10% is good idea to see if you can still live with the impact.
Reduction in Investment Growth: The stock market can be volitile. You might think of putting your investments into safe and secure funds, and find out that they don't perform to your expectations. It is definitely with checking what happens to your financial future when your investments return 2%.
Loosing your Spouse: This is terrible, but an unfortunate reality. What happens to your income if one of you pass away. How much are your survivor benefits.
Needing Care: Let's face it, we aren't getting healthier or more agile. As we age we will start needing more support. At some point, this could be a home care professional or long-term care facility. What does that cost, and does it fit into your retirement plan? Check it out!
Inheritance: Ok, so planning for this is difficult and emotionally challenging. But, maybe it could make the difference in retiring a few years earlier.
Home Value: Maybe part of your retirement strategy is to sell your home. When it is time to sell, you may find out that you can't get what you were expecting or sell it in the time frame you want. Make sure to test out different home values to ensure you reaching your goals.
Emergencies: I suggest you add an emergency fund to your retirement plan. But test out your plan for cases where you need $20,000 to change the roof on your house, or $2000 in car repairs, or $50,000 in health care bills.
Divorce: This article just got dark! Nobody wants to think about what could happen. But you're better to test out this scenario, than to have to return to work in your golden years.
Kids Never Leave: We all think our kids are going to grow up, leave home, and make a life for themselves... just like we did. Well, times are different now. If you kids stay home longer then expected, this could impact your income needs or whether you downsize your home. Check out this article on kids staying home longer.

Under-estimating your retirement needs can result in a plan that's too conservative, leaving you feeling pinched during what should be your most enjoyable years.

4. Fun Facts about Retirement Planning Mistakes

According to one study, more than 40% of Americans have no retirement savings at all! So, if you’re already saving, you’re ahead of the game.
Nearly 70% of retirees regret not starting their retirement planning sooner. It’s a classic mistake that haunts people after they leave the workforce.
The average retiree spends more on travel in the first five years of retirement than they planned for! That's why budgeting realistically is so important.
Around 60% of pre-retirees think they'll work in retirement, but only 30% of retirees actually do. Plan for both scenarios!

5. Conclusion: Balance is Key

The secret to a successful retirement plan? Avoiding these common mistakes that can cause you to over- or under-estimate your needs. Whether it’s forgetting about tax implications, underestimating inflation, or ignoring critical retirement assets like your home, planning requires realistic and balanced assumptions.

Avoid retirement planning mistakes and start preparing by using our free retirement planning tools at Retirementize!