How To Avoid 10 Common, Costly Retirement Mistakes

Achieving a financially stable retirement requires deliberate effort. It is necessary to make wise financial choices from a young age, ideally starting in your 20s, and consistently follow through with your retirement plan.

“The two biggest mistakes are retiring from something instead of retiring to something; and then underestimating your actual cost of retirement,” Bruce Ward, a financial advisor with Cutter & Company in Ballwin, Missouri, told RetireGuide. “The happiest retirees fill their time with something that provides meaning to their lives. Find that something before retiring.”

This guide outlines 10 of the most common retirement planning mistakes and how to avoid each of them. Dodging these roadblocks can help you keep your finances on track and help you focus on retiring to something you want.

To secure your retirement and prevent financial struggles, it’s crucial to craft a plan that considers your likely lifespan. Include details like your intended retirement age, where you’ll live after retiring, your health and the lifestyle you aim for.

Not having a plan can leave you holding on to excess cash. This may look good on your bank account, but it can keep you from maximizing your retirement investments and savings, according to Moneyzine CEO Jonathan Merry.

“Hoarding your cash and your money in non-income generating platforms means you are missing out on passive income that would greatly benefit your retirement plans,” Merry told RetireGuide. “Retirees who avoid even the slightest risks are essentially missing out on the tremendous potential of compounding interest.”

Having a clearly defined retirement plan will prevent this, and working with a licensed financial advisor or professional retirement planner can help you create a solid plan.

Claiming Social Security benefits at the wrong time can mean either missing out on thousands of dollars in benefits or losing out on the maximum amount of money available.

“One common mistake is claiming Social Security benefits too early, resulting in reduced monthly payments over a lifetime,” Celeste Robertson, an estate planning attorney, told RetireGuide. “Analyze your individual circumstances, health and retirement goals to determine the optimal age for claiming benefits.”

If you start at 62, but your full retirement age is 66, your checks could be 25% less, affecting both you and your spouse. Yet, waiting brings rewards. At 66, you get the full amount; and waiting until 70 increases it by about a third.

Some people may fail to consider how Social Security’s spousal and survivor benefits may give them more income in retirement.

“If one spouse has a much higher income than the other, it could be beneficial for the lower-earning spouse to claim benefits early,” Evan Tunis, President of Florida Healthcare Insurance, told RetireGuide. “If one spouse passes away and the other is eligible for a survivor’s benefit, they should consider taking advantage of this opportunity.”

Your full retirement age depends on when you were born. But your health and desire to continue working can affect precisely when the time to apply for Social Security is right for you.

You can take a few simple steps to avoid this Social Security mistake.

Delaying your retirement savings can have negative consequences. Many people delay retirement savings, thinking they have plenty of time or they prioritize other immediate financial needs.

“Time plays an important role in the growth of your investments. The earlier you start saving, the more time your money has to grow through the power of compounding interest,” Merry said. “As time passes, the compounding effect becomes less impactful, and you may need to contribute larger amounts to catch up on the retirement savings you’ve missed.”

Compound interest grows on the initial amount put into savings and the interest already earned. It speeds up how your investments grow. It gets stronger if the interest rate, compounding frequency or investment time changes.

For investments, compound interest is good for building wealth. Loans with compound interest, however, accumulate more debt. Your finances are affected by how compound interest is applied.

The best way to avoid waiting too late to start saving for retirement is to start saving with your first paycheck. The second-best way is to start now. But since you can’t turn back time, there are some ways late starters can catch up on savings for the time they’ve missed.

If you don’t participate in your company’s retirement plans — such as a 401(k) or similar plan — you could cost yourself hundreds of thousands of dollars when you retire. And if your employer matches your contributions, failing to take full advantage could result in missed opportunities for extra money.

For example, if you contribute 6% and they match 3%, that’s like receiving free money.

Remember that there are limits on contributions but take advantage of catch-up contributions available for those 50 and older. Some companies may even match student loan repayments with retirement contributions.

In addition, workplace retirement plans can help you build good savings habits and better understand how to plan for retirement. These plans can also give you tax advantages now and in retirement. Plus, they allow you to take out a 401(k) loan if you ever need the money for an emergency or financial opportunity.

A common mistake in retirement planning is not guessing how long you’ll live after retiring. According to the Stanford Center on Longevity, if you live three years longer by 2050, your basic living expenses will cost 50% more.

“When we talk about retirement, longevity is a hard topic — we live longer, but our financial plans often operate on outdated life expectancies,” Daniel Morris, founder of My Caring Plan, a website for caregivers and older adults in the later stages of life, told RetireGuide.

Diversifying income sources and considering passive income streams is a good hedge, Morris said.

“Retirees should take into consideration the fact that they may live to be much older than they anticipate. This means that their retirement funds must last longer, and therefore, it is important for them to plan accordingly,” Tunis said.

There are no certainties as to how long you’ll live. But there are some ways to help you estimate your life expectancy. These include using life expectancy tables from the government, a life expectancy calculator or guessing based on family history.

Retiring at around 65 years old could mean spending 25 to 30 years in retirement. For this reason, advisors suggest saving enough to cover such a lengthy time in retirement.

“Plan on living to at least the age that your oldest grandparent lived,” Ward said.

He said there are also three issues woven around longevity that you need to consider. All require addressing early and planning for:

“Planning for the trauma of aging before you need to make a decision allows you to think clearly and involve family and friends in the decision-making process,” Ward said. “Remember, surprises in old age are rarely fun.”

Ward suggests using an annuity to provide a lifetime guaranteed income source.

“Running out of enough money to live comfortably is a real danger of longevity,” Ward said. “I like using qualified money, that is, IRA and 401(k) money, to purchase the annuity.”

He points to two types of annuities that provide retirement income you cannot outlive: an income annuity and a variable annuity that has a guaranteed lifetime income rider.

A single person aged 65 in 2023 may need about $157,000 saved to cover health care expenses during their retirement, according to the Fidelity Retiree Health Care Estimate. A 65-year-old couple will need $315,000.

“People frequently overlook factors such as rising health care costs and longer lifespans, resulting in insufficient savings,” Michael Hammelburger, the CEO and a CPA at The Bottom Line Group, a finance company in Baltimore, told RetireGuide.

Medicare does not cover all medical expenses. You still may have significant out-of-pocket costs associated with most plans. And Medicare does not cover any long-term care costs.

Around 70% of today’s 65-year-olds might need long-term care. And 20% could need it for over 5 years, according to research from the U.S. Department of Health and Human Services. Women tend to need it on average 18 months more than men.

The average monthly cost of a private room in a nursing home in the United States was $9,034 in 2021, according to a survey by Genworth. Semi-private room care was $7,908. Both were expected to top $10,000 a month by 2023.

While Medicare can offset many hospitalization, prescription and routine doctor’s visit costs, rising medical expenses in the United States require early planning for your medical care in retirement.

Finally, know your health issues. Be aware of risks and take steps to minimize them. Sometimes, simply eating right and staying in shape now can pay off later.

“Health is wealth, they say, so investing in good health practices now can reduce future medical expenses,” Morris said.

It’s essential to avoid poor investment strategies in retirement, adjust your investment strategies periodically before retirement and consider how inflation erodes your savings’ value over time.

“Individuals may need to reassess their risk tolerance and consider diversifying their investments during economic downturns,” Hammelburger said. “Adapting may entail postponing retirement or changing spending habits to account for lower returns.”

Investments must take into account inflation, which can make it harder to afford necessities in retirement, according to Merry.

“For example, a 3% inflation rate can reduce the purchasing power of retirement assets by about 42% over a 25-year period,” he said.

Having and paying attention to your investment strategy can pay off by retirement. Keep an eye on your retirement goals while monitoring inflation and investment returns.

One common error in retirement tax planning is overlooking the tax consequences of different income sources, including Social Security benefits, retirement account withdrawals and investments, according to Hammelburger.

Failing to maximize withdrawals from accounts with tax benefits and taxable accounts can lead to unnecessary tax burdens. Additionally, neglecting strategies like Roth IRA conversions or keeping up with tax law changes can hinder effective tax management during retirement.

“Neglecting tax planning can lead to unnecessary tax burdens during retirement,” Robertson said. “Some retirees overlook tax-efficient withdrawal strategies from retirement accounts, potentially triggering higher tax rates.”

The financial experts who spoke to RetireGuide suggested that if you anticipate higher taxes during retirement, it may be wise to opt for Roth accounts. This move will require you to pay taxes upfront, but you will benefit from tax-free withdrawals later. On the other hand, if you expect lower taxes in the future, it might be better to go for traditional IRAs or 401(k)s.

Taxes can be complicated. It is wise to seek tax advice from a professional before you hit retirement.

“To avoid these pitfalls and ensure a more financially secure retirement, it is critical to work with a financial advisor and stay proactive about tax-related updates,” Hammelburger said.

Another mistake among new retirees is to continue spending as they did when working. This can cause you to burn your retirement savings much faster than expected.

The first few months of retirement may also hit you with unexpected sticker shock.

“The early retirement years can be expensive,” Ward said. “Extra costs include Medicare supplements, maybe more medicine and travel are the obvious new expenses.

He added that staying busy and entertained without a full-time or part-time job will cost more than expected.

Sticking with pre-retirement spending can hurt due to less income. Long retirement needs require a realistic view. Your savings may appear vast, but retirement could last decades. You will need careful financial management with your lower income in retirement.

Creating a retirement budget is a crucial part of any retirement plan. It can be the key to determining how much money you’ll need in retirement.

“As an advisor, I know that telling someone to start a budget is like telling someone to start dieting,” Ward said. “However, a budget is critical in retirement because most people really don’t know where all their money is going — and so, budgeting isn’t necessarily spending less, it’s knowing how you are spending your money.”

Creating a realistic budget means you’ve taken the first step to avoid overspending.

An RMD, or required minimum distribution, is a mandated annual withdrawal from retirement accounts like IRAs and 401(k)s. It’s the minimum you must withdraw after a certain age to follow tax laws. After the SECURE 2.0 Act, you start at 73 (or 75 if you were born in 1960 or later). Exceptions apply if you’re still working or have Roth IRAs, which lack RMDs.

If you don’t take a required minimum distribution (RMD) from retirement accounts on time, you can face financial penalties. The IRS imposes a hefty penalty of 50% on the amount that you should have withdrawn but wasn’t. The SECURE ACT 2.0 dropped the excise rate to 25% — and possibly 10% — if you correct the RMD within two years.

This mistake can significantly reduce your retirement savings and disrupt your financial plans, making it crucial to adhere to RMD requirements to avoid these costly consequences.

People miss taking their required minimum distributions because they forgot or did the math incorrectly. Quickly correcting the error is the best way to fix this problem.

These steps won’t guarantee that you won’t be penalized, but they may go a long way in convincing the IRS to waive any penalty.

It’s important to acknowledge and plan for potential mistakes that may arise on your path to retirement. While avoiding financial setbacks is crucial, it’s just as essential to ensure that your retirement years are fulfilling and purposeful, as Morris suggests.

“Retirement isn’t just about money,” he said. “It’s about experiences, community, and legacy. Engage in activities that light up your spirit, nurture relationships, and, perhaps, give back to the community in ways that resonate with you.”