3 Common Mistakes to Avoid in Your Retirement Planning Calculations

by | Feb 21, 2023

We all know how important it is to make a plan for your retirement. But how (or where) should you even start? We’ve found that retirement planning calculators are excellent jumping-off place tools for helping you create a financial plan. They allow you to collect all your financial data in one place and use it to develop a true picture of your financial future. 

However, just because a retirement calculator is well-designed doesn’t mean that they’re foolproof. A lot of human error (even subconsciously!) can throw off the results, pointing you in the wrong direction. To prevent that, take these three common mistakes into consideration the next time you open up your retirement calculator.

1. Not Accounting for Inflation in Your Retirement Planning

Many people make the mistake of failing to plan for inflation when saving for retirement. It’s a big oversight that can transform your retirement from a comfortable living to a frugal struggle. When building your savings, it’s critical that you plan for the reality that the items you need to survive — food, shelter, transportation — will likely be more expensive 20, 30 or 40 years into the future. You need only look at the current economy to understand just how devastating inflation can be to retirement savings. With gas as high as $7 a gallon in some areas of the United States, and cartons of eggs going for $8 in grocery stores, it’s safe to say that anyone buying 2023’s groceries with a 2003 budget is having a tough time right now. 

When calculating the amount to save or invest, it is important to assume an inflation rate of at least 3% per year. The next step is to establish a plan for countering the inevitable increase. In many cases, it’s not simply a matter of saving more. You can use strategic investments with higher returns to help your finances keep pace with inflation. You can also look into products that offer inflation protections like TIPS. The most important takeaway is that you acknowledge the reality of inflation and create a strategy to mitigate the impact on your future finances. 

2. Failing to Plan for Emergencies and Other Uncommon Expenses

Unfortunately, entering retirement does not insulate you from life’s unexpected expenses. Cars still break down, pipes still burst when you least expect it, and furnaces still quit working in the dead of winter. You retired from your job, not the trials of day-to-day existence and existence is expensive! Not only that, the good stuff in life is costly, too. For example, have you included expenses like paying for a child’s wedding, sending the grandkids birthday cards each year, or taking an annual family vacation in your financial forecasting?

These types of expenses tend to get overlooked in retirement planning because they are not consistent, top-of-mind payments like a mortgage or an electric bill. You don’t replace your furnace every month or go on vacation every day, so your mind tends to blank these expenditures when developing a financial plan. 

Creating a retirement plan should absolutely include budgeting for emergencies like car repairs and unexpected medical bills, as well as setting aside funds for fun expenses like traveling, dining out, or helping the kids out with a little money here and there. These types of purchases and payments are also an excellent reminder to craft a retirement strategy that continues to generate income after you have stopped working. A finite savings with minimal ROI can be depleted by the unexpected.

3. Future Faking

One of the biggest mistakes that people make when planning for retirement is lying to themselves about how they plan to actually live out their retirement. They fake a financial future on paper that they likely cannot (or will not want to) sustain out of the misplaced optimism that their spending habits will somehow change over time. It is very important to be realistic about the budget you develop for retirement because you will actually have to live with it. If you never cook at home and you have not for the entirety of your life, why are you budgeting for cooking at home in your 60s, 70s, and 80s? If you buy and read a dozen books each month, why would you plan to suddenly start going to the library every week after retirement? Do you even live near a library? 

There are two ways to prevent this mistake. 

  1. Set realistic expectations for your spending in retirement. Whatever budget you have set, particularly for the fun side of life, it’s likely too low. Don’t fake a future you can’t actually exist in. 
  2. Stop faking. If the real facts about your retirement income show you will need to cut back on certain expenditures, the time to start “training” for that future is now. Cook dinners at home more often. Create a habit of using the library. Practice good financial hygiene now to ensure you don’t get dumped into your aspirational budget without any preparation. 

Would you like more insight into using retirement calculators to plan for your future? Check out the NewRetirement calculator, a Stacking Benjamins favorite that accounts for many of the issues discussed in this article.

This episode of Stacking Benjamins takes a deeper dive into how to use the tool and includes two additional mistakes to avoid for the best retirement outcomes.