8 ways to botch your retirement

"Often people make incorrect assumptions about what their lives will be like in retirement," says certified financial planner Paula de Vos, the president of Synergist Wealth Advisors. "They think they will be in a lower tax bracket, but they may be in a higher one."

Unless your retirement savings have been invested in a Roth IRA or a Roth 401k (see "A tax-free retirement just got closer"), distributions will be taxed as ordinary income. "That could be 25% to 30% less in retirement dollars that someone isn't expecting," Woods says.

Plus, he says, a lot of people think income-tax rates now are the lowest they'll ever be. A look back in history shows they have been higher most of the time. In the 1940s, the top marginal tax rate was 94% for individuals with taxable income of more than $200,000 -- a lot of money in those days, true. But prospective retirees could still be looking at paying higher rates than today's top rate of 35% -- and soon. The Obama administration has proposed increasing the highest-earning tax brackets to 39.6% and 36% for 2010.

Though they're completely unavoidable, taxes have to be considered in planning for retirement income. If you go to all the trouble of saving and then end up with less income than you'd expected, it can definitely ruin your retirement or at least put a damper on it.

Overestimate portfolio earnings

Compounding interest is indeed magical. A little money plus a lot of time can equal a lot of money. (See "Money math you need to know.") But there's only so much it can do with the variables involved.

Retirement hopefuls who dillydally in their savings efforts may find the time portion of the equation so drastically reduced as to be somewhat ineffectual without lots of money thrown in.

Similarly, young people whose savings start strong and then taper off might find that they could have accumulated much more money had they just saved more consistently over time.

• Multimedia: The magic of compounding

Plus, failing to account for market volatility could have would-be Warren Buffetts wishing some days that they had put most of their money in certificates of deposit.

People sometimes assume constant growth rates, Synergist Wealth Advisors' de Vos says.

"They overestimate the amount of certainty in an uncertain world, and it's something you have to maintain vigilance over," she says.

The financial crisis that cut deep into retirement plans in late 2008 is a stark reminder of this.

Miscalculate lifetime earnings

Some optimistic people assume that one day their paltry income will catch up with their spending and they'll finally have more than enough money to pay off the mortgage, save for retirement and pay down debts.

"The Great Depression was so long ago that kids don't know how difficult the job market can be or how bad the economy could get," Woods says.

That lack of perspective lends itself to the work-until-you-die lifestyle. By assuming that things will get better , you face a pretty good chance of finding yourself broke and trying to catch up.

Continued: Head in the sand

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