5 Reasons Your Retirement Math May Be Dangerously Wrong

Retirement can be like a light at the end of the tunnel — the time in your life you get to focus on what matters most to you.

But, there’s a lot of stress that can come with it.

According to a 2023 survey from the Employee Benefit Research Institute, only 18% of workers are “very confident” that their money will carry them comfortably through retirement. The institute also found that 84% of workers and 67% of retirees are worried that a rising cost of living will make it harder for them to save enough money.

“Enough” can be hard to define, though. For one thing, everyone have their own circumstances, and we also can’t guarantee how the economy will fare in the coming years and decades.

With so much up in the air, there are a few important factors to consider when planning for retirement. Money Talks News talked with some experts who say the following factors, however essential, are being overlooked.

Avoid these mistakes as you plan for your retirement.

1. You’re overlooking inflation

Inflation is pretty much a given. Prior to the COVID-19 pandemic, the cost of living was increasing at around 2% every year. But, as we’ve all seen over the past couple years, inflation can jump much higher than that. And there’s no way to perfectly predict when and by how much while you’re retirement planning.

Unpredictability aside, that 2% certainly shouldn’t be ignored either. Andrew Herzog, a certified financial planner and associate wealth advisor at The Watchman Group tells Money Talks News:

“Inflation is the most destructive factor in retirement planning. A subtle increase in average annual inflation from 2% to 3% per year can dramatically affect future purchasing power (especially for those decades away from retirement), thereby requiring additional savings today to compensate, cutting back on expenses in retirement, and more time in the workforce. Otherwise, you face running out of money while still alive.”

You should speak with a trusted financial professional about investing techniques that can help protect — and grow — your nest egg. You can also find retirement planning tools through online advisories such as Empower, and these can help estimate your financial picture under different economic scenarios.

2. You’re low-balling your life expectancy

Humans keep living longer and longer. Men born in the 1950s were expected to live until about 66 or 67 and women then until about 71. The average life expectancy for men is now 75 and five more years (80) for women, on average.

Every single one of those years means thousands of more dollars you’ll need to factor into your retirement planning. Running out of money is a huge fear for some retirees, Herzog explains.

Landon Buzzerd, a certified financial planner and associate wealth advisor with Grant Street Asset Management, tells Money Talks News one way to combat that.

“The longer the time horizon of the plan, the more difficult it may be for the client to envision their living expenses in retirement,” he says. “For life expectancy, we project plans out to age 100 in many cases because data shows the likelihood of at least one person in a couple (husband or wife) reaching age 100 continues to increase.”

3. You’re underestimating health care costs

Our health is another unpredictable aspect of our lives. Experts can provide estimates on how much we may end up needing for health care costs, but conclusions aren’t necessarily consistent.

That being said, 2022 federal data shows U.S. households led by someone 65 years or older spend about $7,540 a year on health care.

Ed Snyder, a certified financial planner and co-founder of Oaktree Financial Advisors, tells Money Talks News, “Health care costs continue to rise. And as you get older, it’s likely you’ll be accessing health care more frequently than earlier in retirement.”

Snyder says one way to plan for these changes is by using a health savings account (HSA). It’s a great method for saving money with tax advantages.

4. You’re not considering taxes

Not keeping tax rates in mind is a retirement planning pitfall.

Herzog explains that the U.S. is seeing some of the lowest marginal tax rates it’s ever had, but they’re not guaranteed to stay that way.

“[W]ill the government raise taxes in the future, considering our enormous debt and interest payments? Pre-tax retirement accounts are most susceptible to this risk,” Herzog says. “Imagine thinking you were actually in higher tax brackets during your working years than retirement, and the laws revert the other way. That will hurt.”

According to Michael Dunham, a certified financial planner and director of planning at Fontana Financial Planning, it’s important to take advantage of the “retirement tax planning window.”

This is the time between when you first stop working until various forms of “forced income” like Social Security, pensions and required minimum distributions kick in. This gap can give retirees one to three years to convert their money to a Roth account and potentially save on taxes.

5. You’re not checking in on spending and expenses

Making a budget one day isn’t enough to ensure financial security for years down the road (or even months, really). We can make educated guesses on our expenses and how much we’ll need to cover them, but if we don’t consistently check in on our spending, we can end up way over our heads.

Eric Amzalag, certified financial planner and CEO of Peak Financial Planning, tells Money Talks News, “[An] overlooked area of retirement planning is having a regular method of bookkeeping and reconciling the retiree’s actual expenses with their projected (estimated) expenses. The whole plan can blow up if one uses projected expenses without ever reconciling to what one is actually spending.”

He explains that this is because your actual spending is what really determines your distribution amount. You could spend (and therefore distribute) much more from your retirement assets than expected if you never take the time to review your expenses. And it may be too late by the time you notice.

Start by asking yourself these questions every month.