7. Not preparing for inflation
Inflation can affect every aspect of your financial life. For example, an inflation rate of 3 percent, Smith says, which is close to historical norms, would mean your expenses will double in less than 25 years—well within a typical retirement period.
So, ignoring the effects of inflation is one of the most overlooked mistakes when it comes to retirement planning and, unfortunately it can have serious long-term implications if not properly accounted for, he says.
Now, the average lifespans are much longer, so you need to take care of your money in order to minimize your chances of consuming your savings too fast. Treasury Inflation-Protected Securities (TIPS, a type of Treasury security issued by the U.S. government) will protect your capital by paying enough interest in order to keep up with inflation.
To earn investment returns that exceed inflation, keep an eye on stocks. Remember that an 8 percent annual return is really only a 5 percent annual return after 3 percent inflation.
Also, you should avoid keeping too much of your nest egg in cash and cash equivalents, like money market funds, because their interest rates are too low and you’ll be losing money in the long run.
