The seven biggest blunders to avoid when retirement planning

There are some sad stories out there in retirement planning and many point to mistakes you want to avoid. Today, we’re diving into the biggest blunders because sometimes the most fun way to learn is by hearing about what not to do. So here’s my top seven.

There are many pitfalls and surprises to watch out for when planning a happy retirement.Credit: Simon Letch

1. Not planning for retirement early enough in life

Many Australians make the mistake of procrastinating on their retirement planning far too long, or assuming they don’t have enough to bother planning with. It’s essential to get proactive at least five years before retirement, and ideally 10 to 15 years beforehand, so you have the opportunity to harness the power of compound investing.

The most important thing to remember is that a 7-10 per cent annual return can double your superannuation fund every seven to 10 years. The earlier you start contributing extra to super, and making sure it is invested well, the more you will benefit, passively.

2. Not developing interests outside work

Retirement isn’t just about hanging up the work boots; it’s a chance to enjoy a whole new phase of life and lean into the things that bring you real joy in life.

The years leading up to retirement, the prime time of your life, is the ideal time to build a portfolio of things that you are passionate about, new pursuits or hobbies, epic holiday plans, a greater focus on your health, purposeful work projects and quality time with family and friends.

Focusing solely on your career or job right up to retirement can lead to a feeling of relevance deprivation after retirement. And that is avoidable.

3. Retiring too early

So many people jump the gun on retirement, underestimating the financial and psychological impacts. Retiring early might seem enticing or even like the stereotypical dream, but it often leads to financial strain and boredom, and quite frequently these people find their way back into the workforce later.

Extended life expectancy means retirement can span decades, so I dare you to consider a much longer period of pre-retirement, where you experiment with part-time work and part-time retirement.

4. Underestimating their real cost of living

We all like to tell ourselves that we’re spending less than we are. And it’s not until we build a budget from our actual bills and expenses and project forward that we can recognise just how much we need to cover our desired living expenses in retirement.

Many people leave out expenses that might not be incurred rhythmically, but can have an unforeseen impact, like sudden needs for an increase in healthcare or allied health spending, or a critical need for home or car maintenance. I suggest that people practise living on their projected retirement budget – and see how they go for a month. It’s an eye-opener.

5. Withdrawing all their superannuation when they retire for dumb reasons

This one blows my mind. The fundamental purpose of superannuation is to serve as a financial nest egg, ensuring a dependable income stream throughout retirement.

Understanding the concept of compound investing is crucial when we talk about it. For most people, 50-60 per cent of their total returns come from superannuation during their retirement years.

Drawing it all out as a lump sum runs counter to the very essence of superannuation’s designed purpose, and it certainly sees those people missing out on a lifetime of earnings unless they have a real strategy behind their decision.

The best way to avoid mistakes is to get some advice when you do your retirement planning. It’s often worth it.

6. Dragging debts into retirement

One of the most common questions I hear is: “What do I do about my mortgage when I retire?” Debt is designed for a time in life when you have the income to pay it down. Entering retirement with substantial mortgage debts, and without the income streams to support it, adds an unnecessary layer of financial stress, putting a damper on the newfound freedom that retirement should bring.

It’s much better to take proactive steps to demolish your debt in the years leading up to retirement. You might contemplate downsizing to pay down your mortgage and get debt-free, or plan your retirement date after the debts are cleared.

7. Putting all their eggs in one basket

There are countless tales of investors who had unwavering faith in a single stock, investment type or fund, going all-in with their super and personal wealth. These true believers faced devastating losses when the tide turned against them.

The Global Financial Crisis unravelled many who heavily invested in property, the Hayne Inquiry shook those entrenched in banking and financial advice, and the tech valuation slide brought down the personal wealth of fervent bitcoin enthusiasts.

Diversifying your investments across multiple sectors and asset classes is the real key to shielding yourself from financial disaster. It is a rare day that all asset classes fall at the same time.

There’s plenty more I could add to this list, but there’s simply not enough newsprint to hold them. The best way to avoid mistakes is to get some advice when you do your retirement planning. It’s often worth it.

Bec Wilson is the author of the bestselling book How to Have an Epic Retirement and host of the new podcast Prime Time with Bec Wilson. She writes a weekly newsletter at epicretirement.net.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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