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The 4 Biggest Retirement Planning Mistakes

Boomers face significant challenges to make ends meet in their retirement years, and they'll need to make every dollar count -- there isn't much margin for making mistakes. Here are four big mistakes that roughly half of all Americans are making -- and a few tips for avoiding them.

Mistake #1: Starting Social Security Benefits Too Early

According to Social Security's Annual 2010 Statistical Supplement, 47 percent of Americans who retired in 2009 -- almost half -- started their Social Security income at age 62, the earliest possible age with the lowest possible benefit. Almost three-quarters -- seventy four percent -- of Americans started benefits before their full retirement age.

Social Security income is a great deal -- you're paid a monthly benefit for life, no matter how long you live and no matter what happens in the economy. And it's indexed for inflation. But for most people, it pays to delay taking benefits in order to make your income as large as possible. Just don't delay benefits past age 70; your payout won't increase after that so you won't gain anything by waiting.

I realize that putting off Social Security is easier said that done -- you may need the money. One good strategy is to work part time while you delay drawing benefits. Your part-time pay replaces the Social Security benefits you're forgoing. By working just part time, you'll still have more time for yourself -- compared with working 40-plus hours per week -- so you'll be able to realize some of the advantages of being retired.

Mistake #2: Guessing How Much Retirement Savings You Need

According to the 2011 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), only 42 percent of Americans have actually calculated how much money they'll need to save for retirement. An equal percentage of Americans simply guess at this amount -- and they usually guess too low! The unfortunate, inevitable result is that these people will exhaust their retirement savings in their 70s or 80s, at which time they'll either need to move in with their kids or live in a tent and eat noodles.

The EBRI study also shows that people who calculate how much savings they'll need are more confident about their ability to retire. So try calculating how much money you really need to save, then increase your savings accordingly -- you'll feel better about your retirement years. Choose to Save is a nonprofit program that offers a simple online calculator to help you with these calculations.

Mistake #3: Drawing Down Retirement Savings Too Quickly

When many Americans retire, they just start spending the money in their 401(k) and other retirement savings accounts to meet their current needs, without understanding that these savings need to last for a retirement that is likely to last 20 years or more. According to the 2009 Risks and Process of Retirement Survey conducted by the Society of Actuaries, 36 percent of retirees withdraw from their savings with no set plan, 24 percent withdraw to pay for emergencies, and 10 percent withdraw for major purchases. Adding up these percentages, it's safe to say that at least half are drawing down their savings too quickly. The unfortunate result is they'll outlive their savings, with the undesirable consequences mentioned above.

Of course, there's good news from this survey, too. Eleven percent of retirees have a set plan for regular withdrawals of interest and principal, and another 11 percent withdraw just the investment earnings -- both good strategies.

I'd encourage you to learn about the three ways to generate retirement income from IRAs, 401(k)s, and retirement savings; these methods are intended to generate retirement income for the rest of your life, no matter how long you live. Knowing how you'll generate lifetime retirement income -- and how much income you can expect -- is critical to planning a prosperous retirement.

Mistake #4: Being Overweight

The Society of Actuaries recently reviewed almost 500 research papers that studied the effect that obesity has on your health and life expectancy; they published the results in the paper, Obesity and Its Relation to Mortality and Morbidity Costs. The report shows that two-thirds of Americans are considered overweight, with a body-mass index (BMI) of 25 or higher, and one-third are considered obese with a BMI of 30 or higher.

A number of studies estimated the average or median health care costs per person associated with these different BMI groups. The overweight BMI group had higher annual medical costs, compared to the healthy BMI group, that ranged from a few hundred dollars per year to more than $2,000 per year. And there were similar increases in comparing the obese BMI group to the overweight BMI group. That's money that's flying right out of your pocket, even if you're covered by medical insurance.

Another eye-catching number from this report: The total annual economic cost of having citizens who are overweight and obese in the United States and Canada was approximately $300 billion in 2009. That figure is based on medical costs, excess mortality and disability costs. Just imagine if we all took better care of our health by eating better, getting exercise and stopping smoking. Collectively we could save boatloads of money for our retirement!

By taking just a few smart steps, you can avoid these four common retirement mistakes. Then you'll be on the road to a healthy and prosperous retirement.

Want to avoid making retirement planning mistakes? Check out my latest creation -- an innovative online retirement planning guide Money for Life. I've organized a rich collection of more than 150 blog posts, articles, research reports and video clips on the most important retirement planning decisions regarding money, health and lifestyle.

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Image from iStockphoto contributor MathieuViennet

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