Even experienced savers can overlook costly red flags in their retirement plans. According to financial advisor Stoy Hall, CEO and founder of Black Mammoth, these hidden pitfalls can drain savings, create unexpected tax burdens and force difficult lifestyle changes.
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From misjudging the true cost of retirement to relying too heavily on one income source, these issues can undermine even well-prepared plans. Here are five red flags Hall sees most often and the practical steps to address them before it’s too late.
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Misjudging how much money is needed to retire comfortably is a common red flag in a retirement plan. Many people set vague goals without calculating their current monthly lifestyle costs or projecting how those expenses could increase with healthcare, inflation or family commitments.
“They throw out numbers like ‘I think a million will do it,’” Hall said. “But they have no clue what their monthly lifestyle costs now, let alone what it’ll look like when healthcare hits, inflation eats their cash flow, or travel, caregiving, or grandkids come into the picture.”
Hall said tracking actual monthly spending and adjusting for 3% to 4% inflation annually can prevent underfunding a retirement plan and help retirees plan with confidence.
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Dependence on a single type of account or income stream is another red flag in a retirement plan. Hall said this can result in substantial tax hits, limit flexibility and increase the risk of running out of money prematurely.
“Massive tax hits in retirement happen when you start pulling money from all-taxed accounts with no flexibility,” he said. “That can lead to running out of money early because your plan was based on assumptions, not real numbers.”
Hall said retirees should evaluate their plans using three key benchmarks: a sustainable withdrawal rate of 4% or less, no more than 80% of savings in taxable accounts, and replacing at least 70% to 80% of current take-home income in retirement.
Meeting these targets, Hall said, can help safeguard income and reduce the need for sudden lifestyle changes later in retirement.
Concentrating savings in pretax accounts such as 401(k)s is a red flag in a retirement plan. Without other account types, retirees may face large tax bills and reduced flexibility later.
