Avoid These 7 Financial Mistakes Retirees Make

Wouldn’t it be great if “the experts” would share the most common financial mistakes retirees make?  Experts who work with thousands of retirees, and have seen first hand the mistakes that happen frequently? While we’re dreaming, wouldn’t it be even better if we also had a list of tips to avoid these mistakes?  Maybe even with some links for additional articles related to the most common mistakes?

That is exactly why I wrote today’s post.

Avoid these 7 common financial mistakes retirees make.  Here's the list, along with steps you can take to avoid them. Click To Tweet

Even if you’re not yet retired, I encourage you to read this post to ensure you’re taking steps to avoid these mistakes as you plan for your own retirement.  Some of them are easier to fix if you have more time (Oh how I wish I had more time to fix my own problems with #6).

Let’s learn from the mistakes of others…

financial mistakes retirees make

I recently came across this post about financial mistakes retirees make, written by financial advisors who have seen thousands of folks cross the starting line of retirement.  I’ve added my personal commentary, highlighting some tips on ways you can avoid these mistakes in your retirement planning.  I’ve also added links to relevant articles I’ve written which address some of these issues in more detail.


7 Financial Mistakes Retirees Make


1. Lacking A Realistic Financial Budget

Knowing how much you expect to spend in retirement is a fundamental piece of retirement planning.  It’s impossible to safely set a retirement date if you don’t know how much you expect to spend, and how much you can safely withdrawal from your investments to pay for it.  Make sure you consider the tax expenses you’ll incur during retirement since these will also have to be covered by your investment withdrawals.  This is especially true if you have a significant amount of your retirement savings in Before-Tax IRA’s or 401(k) accounts. Finally, be realistic about your healthcare costs, especially if you’re retiring before you’re eligible for Medicare.

Once you’ve retired, make sure you’re monitoring your actual spending versus what you had planned, and adjust accordingly if you see withdrawals edging above your targeted level.  Know what spending is discretionary, and be prepared to reduce it as your situation dictates. 

Tips To Avoid This Mistake:  Don’t retire until you’ve tracked your spending for at least 6 months to ensure you’re using a realistic estimate for your retirement spending.  If you’re already retired, build a way to track your spending, even if you only do it on a high level (that’s the approach I’m using, which I’ll share in a future post). 

Further Reading: 


2. Having An Appropriate Respect For Risk Vs. Return

The transition from “Accumulation” to “Withdrawal” is one of the most significant financial adjustments you’ll make in life.  While risky investments may have been fine while you were dollar-cost averaging during your working years, the reality is that your risk profile changes once you retire.  Sequence Of Return risk becomes a major consideration, and the need to avoid selling stocks during a downturn is something you need to address with your Asset Allocation.  Rather than just focusing on a return ON your money, retirement is a time to also consider return OF your money.

Tips To Avoid This Mistake:  Make sure you’re monitoring your Asset Allocation (I use Personal Capital to simplify the process, as I explain in this article), and have a system in place to ensure you won’t need to sell stocks during a downturn.  (I use the Bucket System, which I explain here).   Recognize that your risk profile changes when you move into the Withdrawal Phase in retirement, and have a plan in place to deal with the associated risks.

Further Reading:  T


3. Taking Social Security Too Early

Historically, most folks have taken their Social Security at the earliest possible date.  They worry that Social Security will “run out of money”, so they best get it while they can.  As folks study the issue in more detail, however, they recognize the benefits of delaying Social Security. Based on the data, roughly half of folks are now taking Social Security as soon as possible (down 10% over the past decade).  This is a common area for debate, with folks coming down on both sides of the issue.  The important thing is to make an educated decision.

Tips To Avoid This Mistake:  The decision on when to claim Social Security is a very important decision.  Don’t make it without studying up on the issue, and understanding the pros & cons of all of your options.  In our case, I’m planning on deferring to Age 70, primarily as a longevity insurance play (see my logic here).  Make your own decision, but make it an educated one.

Further Reading: 


4. Not Understanding Tax Implications 

Of all of the mistakes retirees make, this is the one which I struggled with the most in my personal retirement planning.  I found it difficult to model the tax implications of withdrawing my Before-Tax 401(k) funds, though I did put a general tax assumption in my Retirement Cash Flow Model.  For many retirees, they see $1M of Before-Tax money in an IRA and fail to recognize that they’ll actually receive much less than that on an After-Tax Basis.  Taxes are likely to be one of your largest expense items in retirement, make sure you’ve taken them into consideration as you finalize your retirement plans.

Tips To Avoid This Mistake:  If you’re using something like a 4% Withdrawal Rate assumption in your planning, make sure that your spending includes the taxes you’ll be obligated to pay.  Don’t apply the 4% withdrawal rate against Before-Tax account balances and assume you’ll be able to spend the resulting funds entirely on living expenses.  Also, make sure you’re looking at Required Minimum Distributions, and doing what you can to minimize these in the years before they kick in.

Further Reading: 


5. Ignoring The Effects Of Inflation

One of the mistakes retirees make is to fail to appreciate the impacts of inflation.  While many assume their Safe Withdrawal Rate can increase with inflation each year, that’s only true if the underlying investments you own have the potential to keep up with inflation.  Many retirees are tempted to be too conservative with their asset allocations when in reality the long lifespan can support some allocation to higher growth investments, which are typically required to offset the impact of inflation.

Tips To Avoid This Mistake:  Don’t get too conservative with your asset allocation.  You need some higher growth investments to keep up with inflation.  Just make sure you’ve got sufficient liquidity to avoid selling equities in a downturn and limit your higher growth allocations to money you don’t need for the next ~7+ years.

Further Reading: 


6. Having Too Much Tax-Deferred Savings

I’m “Guilty As Charged” on #6 of the mistakes retirees make, a situation I suspect many baby-boomers are also facing.  As I shared in our retirement drawdown strategy, over half of our portfolio in tax-deferred savings:

tax deferred savings in retirement

While we were working our way up the corporate ladder in the 90’s-00’s, it felt great to get that tax break by diverting our income into tax-deferred savings (Besides, none of us had access to Roth accounts way back then, right?).  Unfortunately, we’re facing a stiff tax bill now that we’re in retirement and making plans to access those “not yet taxed” dollars.  I’m working hard to rectify my situation before Required Minimum Distributions take a vicious tax bite out of our portfolio when I turn 70 years old, which I outline in the “further reading” links below.  I encourage you to do the same.

Tips To Avoid This Mistake:  If you, like me, find yourself with a large % of your portfolio in “Before Tax” buckets, don’t ignore the situation.  At a minimum, talk to your CPA or CFP to develop a strategy for “topping off your marginal income tax bracket” with Before-Tax withdrawals (or ROTH conversions) each year.  Don’t wait until RMD’s kick in – by then, it’ll be too late to do anything about it.   

Further Reading: 


7. Failing To Prepare For The Inevitable

Let’s face it, we’re all going to die.  Before we reach that point, most of us will reach the point where we’re unable to manage our financial affairs.

It’s an unpleasant thought, but it’s a reality.  I’m sure many of you have watched your parents go through the realities of aging.  We’re naive if we don’t appreciate that it’ll also happen to us.  Don’t ignore it.  Plan for it.

While you’re still able, get ready for the “inevitable illness, incapacity and death” we’ll face in the future.  Get your health care proxy taken care of, along with the appropriate Power Of Attorney, your will, Estate Planning details and instructions on how to access your online accounts.  Organize your information into a neat package so those that have to step in will know what to do when the time comes.

Tips To Avoid This Mistake:  Every year, I update a “Love Letter” to my wife with all of our updated financial statements.  I include a written letter with step-by-step instructions for what she should do in the event of my death.  It’s reassuring to both of us to know that she has that letter “just in case”.   We’ve done “the packet” of recommended legal documents, though in full transparency those items are due a review since it’s been a few years since we updated everything.  I just added it to my calendar for January, and encourage you to do the same.  Finally, here’s a relevant post on The Best 8 Online Will Makers

Further Reading: 


Conclusion

We’re naive if we think we’re above making mistakes in our retirement planning. 

In reality, there are some common mistakes retirees make and we’d be wise to learn from their experience.  Listen to the experts, and check each of the issues raised to ensure you don’t have any blind spots in your retirement plan. If you found a few areas where you’re at risk, click on the “Further Reading” links and take the steps now to minimize your risk of repeating the mistakes other retirees have made before you. 

Your Turn:  Have you made any of these “common mistakes retirees make”?  Are there other mistakes you’d warn retirees to avoid?  Let’s chat in the comments…

35 comments

  1. I’m only semi-retired so I can’t say this with certainty, but I think #1 is the biggest threat for many or most. I can see that most folks won’t be able to predict all of the things they’ll get involved with in retirement. Like picking up new hobbies that might cost money, or getting a travel bug. For me personally, I have no idea what new muses I’ll have in 20 years, but I know that I’ll gravitate toward some new hobby and it’ll likely cost money!

    1. Ironically, Dave, I just read an article this morning that says most retirees over-spend in their first year of retirement, primarily due to spending on building up the “toys” and “hobbies”. We were careful to try to get all of that spending completed before I retired, and are actually tracking below our estimated spend rate for our first year. No complaints!

  2. Thanks for sharing, I am always looking for something to “watch out for.” Now that I am completing year #4 in retirement I can say #4 of the Most Common Mistakes, Not Understanding Tax Implications, took a bite out of me once, a big bite. Not that I didn’t understand taxes, I was just used to things working differently when I was employed and should have paid more attention. Oh well, it didn’t kill me and things worked out well.

    Enjoy the journey

    1. “The Hiker”!? I like your new nic, Kirk! You’re not alone in getting hammered by the tax details. It’s an incredibly complex area, and one we tend not to focus on too much when our employer is taking care of all of the admin for us. I had to start paying quarterly estimated taxes this year, will be interesting to see how things pan out by the time I do our taxes next year. Looking forward to sharing some creole cuisine with you, my friend!

  3. Awesome post, my friend. Mrs. Groovy and I are coming up on three years of retirement and we attribute our success thus far to points one and two. We’ve tracked our spending all the while and it’s a great way to stay disciplined. Our goal was to spend less than $4,000 a month and thus far we’ve been spending $3,200 a month. We also went into retirement with a relatively small equity exposure (40% of our portfolio) to guard against the dreaded sequence of return risk. This strategy dampened our returns over the past three years, of course, but our portfolio is still up nearly $200,000 and we’re rapidly approaching that wonderful state of affairs in which a 2008-like market crash wouldn’t hurt us at all. And I hear ya about point six. Fifty percent of our portfolio is in tax-deferred accounts and we’ll get hit pretty hard by the taxman once we start taking RMDs. Hope all is well at World Headquarters. Cheers.

    1. $3,200 a month! You’re my hero, Mr. G! I recall reading about your plan to follow Kitce’s reverse glide path strategy, glad it’s worked out well for you. Yeah, you’re in an interesting spot with your tax-deferred $$ – you’re held hostage by those wonderful ACA subsidies, what a unique dilemma. Enjoy it while it lasts, clearly worth taking full advantage of those subsidies while you can! And yes, all is great at the World HQ, thanks for asking! 🙂

      1. Mr. Groovy and Fritz…I’d like to build on the comment about the reverse glide path strategy once in retirement. Both Kitces and Karsten (Big ERN) have studied the concept of a RISING equity glide path in retirement, esp’y for early retirees who are looking at 30+ years of retirement. My questions for Mr. Groovy….1) Have you started raising your equity % from the baseline of 40% from 3 years ago?, 2) If so, are you “passively” doing this through the natural rise of the market (i.e. not rebalancing) or taking an “active” approach and buying more equities from your cash position?, 3) If we all agree that a correction will happen, how does one know when to start raising the equity portion? My personal opinion…we would start retirement at a baseline % (i.e. Mr. G’s 40%) and hold there as long as the market is climbing. Once the market starts a correction, then buy more to not only hold the 40%, but to actually increase it. The rate of increase is still TBD as I read more about ERN’s results in his fantastic series on SWR. Welcome your thoughts.

  4. Fritz, if you are looking for a side hustle you can set up a 30 minute phone chat for those people like me (mid 40’s) looking for a guide to bounce ideas off of. I would be willing to pay for basic advice from you on a personal level. Nothing technical just “what would you do if you were me.” Just an idea.

    1. Hey Melissa, I’ve considered it, but have decided against coaching at the moment. The blog takes more of my retirement time than I planned, and I’m also working on a book. I really can’t justify commiting more time than that in my early retirement years, it’s too important for me to get outside and play! I hope my words are helpful to you, thanks for being a reader!

  5. I’m guilty of #6 as well. However, we have 35 years left before RMD so I think we can deal with it. I plan to start our Roth IRA conversion soon.
    Also, you probably did very well on the tax savings. The tax rate is lower now for you, right? I’d love to see a post with more detail about that.
    When you contributed to the 401k, you’re saving at the top of the tax bracket. Now that you’re withdrawing, your effective tax rate should be much lower than that. Show us the numbers.

    1. Hey Joe! I wish I had 35 years before I had to worry about the RMD! And yes, the tax savings were nice during my career, but in reality a lot of my before-tax 401(k) contributions were made early in my career, when I was much lower on the earning scale. Roth wasn’t available at the time, so I haven’t really worried about how much better it could have been. I’m content with what we have, I just have to optimize our conversion to the top of the marginal tax brackets each year. I do expect our effective tax rate to be lower in the coming years, tho this year was more profitable than I expected due to a final payout of a large long-term option incentive from my employer. Looks like that rollover will have to wait until next year!

  6. All is sound advice. But let me add a thought. Don’t be hustled into believing that in your retirement your financial holdings should focus on income. Most planners will assume you will need income from your investments upon retiring. Yes, that’s true. But don’t get stuck exclusively with bond and/or CDs.

    Rather, be sure to have at least some of your holdings in common stocks. Seek out big companies that pay decent dividends, so you’ll have some income from them. Or, if you prefer mutual funds or exchange traded funds, a good idea is to invest in the “dividend aristocrats.” These are large companies that have a history of paying decent dividends which increase year after year. In this way, you’ll have some income from the dividends and, importantly, have securities that will participate in the growth of the economy. Bonds and CDs do have a place in your portfolio, but mostly as a repository for money waiting to be investing .

  7. I’m still educating myself on one of these — #6, as my late husband had a municipal deferred comp account. Can you provide more information on the tax implications once you reach 70? Or point me to a good source for further self-education?

    1. Hey Lori, I’m sorry to hear about your husband’s passing, and give you credit for educating yourself about the issues. I’m not sure if a “muni deferred comp” has the same rules as a 401(k), but in a 401(k) you are required by law to withdraw a certain % of the account each year starting at Age 70 1/2. The withdraw is taxable, and is added to any other income you have (e.g., pension, social security). I’d encourage you to find a good CPA in your area, and take them out to lunch to talk through your situation. It should be something any licensed CPA can help you with. Good luck, and let me know if you have any further questions.

  8. #7 The “love letter” concept is a great one. The one thing you didn’t mention is you should read your love letter to your wife while you’re still alive. Your spouse shouldn’t be reading it for the first time after you die. Your spouse needs to understand why you do what you do with your money now, not after death. The love letter should be a nice reference or reminder.

    The same goes for wills and inheritance. I’ve got more that I need to take care of, but for example, my son knows my wishes/recommendations of what he should do with his inheritance should I pass sooner than later. I’m in no way controlling what he does with it, but he knows what my fatherly advice is (to pay off various real estate assets).

    1. Good point, Hobo. I do go through our Net Worth statement with her, and I did read through the love letter the first year I put it together. Now, she just prefers to know it’s available if she ever needs it, but I agree it’d be good to go through the details with her, especially now that we’re retired and have moved into the Withdrawal phase of life. Great advice. Also, good point about inheritances. I need to spend time with our daughter and son-in-law on that one, too. I actually thought at one point about putting in writing that it all go into an SPIA, they could enjoy the income stream, and I’d never have to worry about them doing anything foolish with the inheritance…

  9. I can retire in 52 days. I’ll be 60. I am in the position where I will have a large amount of tax deferred income to pay taxes on when I’m 70 1/2. That is my biggest concern right now. I’m trying to figure out ways to reduce this burden, and am really tired of people saying that “it’s a nice problem to have”. It’s a BIG problem. Any advice? Thanks, and I’ll see you on the retirement side!!!

    1. 52 Days!! Woot Woot! Welcome to The Starting Line – you’re going to love it over here. You’re right about the tax deferred being a big problem. I’d suggest you read the New Tax Law Loophole (https://www.theretirementmanifesto.com/the-new-tax-law-a-loophole-for-retirees/) for some specifics on how I’m dealing with it. You’ll definitely want to start topping off your marginal tax bracket every year, the article should help you to understand the strategy. Congrats again on your retirement!

  10. Nice additions to the post, Fritz. While we have 7 years before needing to really decide on SS, that is definitely a big variable we’ll need to consider. Right now, we are looking at 62 for low income bride, and FRA for me. But that could change with changing health. As a military retiree, much of our pension income would stop (and about 25% of our SS) if I died first – so we are paying attention to genetic probabilities.

    Since SS projections assume we are earning at current rates until FRA, it will be interesting to see how our projections change when W2 income drops to zero. Bride’s projection is definitely more sensitive than mine, as she still has $0 years in her 30 year record.

    1. Hey Kev, I agree the SS details are interesting, and ever changing. Best thing to do is exactly what you’re doing, pay attention to the detail, and hold off making a decision until you have to. Interesting about the military pension drop-off at your death, didn’t realize that. Mine will drop 50%, but we bought a 20-year term life insurance policy to help bridge her income if I were to die early. Doesn’t cost much, and brings a bit of peace of mind. Might make sense in your situation, too.

  11. Hi Fritz
    Not in the same order as above!! Too hard to keep paging back…
    1) We have about 50% of our savings in tax-free pension savings. In UK our tax-rules are different. If you earn more than £55/60k p.a. approx, then your private pension savings at the point of investment are ‘given back’ 40%. A huge incentive, particularly on the growth phase, when you are building them. When you come to withdraw them, in many cases, you will withdraw them at 0- 20/25% tax depending on your retirement income. Even better, the unused ‘pension pots’ can be left free of Inheritance tax. (Complex rules – UK residents, please take financial advice, it will be worth it! )
    2) Taking the UK state pension. My husband collected his at 68, rather than 65, which gave him a lovely 10%bonus p.a. Sadly this has now been reduced to 5%. I still have a couple of years to decide when it is best for me, but my state pension will be lower than his (long story). A few spreadsheets to come…
    3) Trying out your proposed retirement income. We called it our Pension Diet. We did this for nearly 2 years in advance of retirement. Very informative. We also used that time to clear up no longer required ‘regular payments’ that just keep going until you cancel them… How many people check all their accounts and credit cards every month for more than a year to identify things they had forgotten about (maybe a future post for someone!!). My ones were Ancestry, and FindMyPast among others. Family history was a major interest prior to blogging, but I sort of forgot about them, when it came to looking at my annual costs!
    4) Inflation is a real concern for me. My pension rises at 3% p.a max, so I do worry about a return to the 70’s and hyper-inflation. (My first mortgage was set at 14.5%!) For the debt conscious, it not only knackers your income, but erodes your savings. The only people it helps are those with loads of debt. Ask those who lived in Zimbabwe about 1990’s…
    5) Agree about the ‘be prepared!. You have to die sometime. Hopefully some years hence. My letter to my husband is the reverse of yours, I sort out all the accounts, and do everything financial.. But there is a large envelope in the filing cabinet addressed to husband / children, saying – come the day you need it, this us what you need to know, and who to contact, including people like my cousin who will arrange to get our investments sorted out. Like you I update it every year. Power of Attorney/wills already in place. Makes sense, but so many people are scared of making a will. I had a serious conversation with a 30 year old a few weeks ago and he said, I’m far too young – I said you are only 1 motor accident away. It costs a small amount, and saves untold worry. DO IT!

    1. Erith, your wisdom continues to impress me. Great comment, and interesting to read about the U.K. specifics. I love your #3, a friend of mine called it a “Retirement Test Run” and attempted to live at retirement spending level for his last 2 years of work. Amazing minds think alike! Also, I do worry about inflation, especially since my pension is fixed for life. You’re fortunate to have an inflation adjustment in yours. Even if you hit the 3% max, at least you’ll only have to deal with the gap between the ceiling and actual. Not many folks are as fortunate. Finally, great reminder for everyone to “Do It” – you never know when the end will come. Thanks for stopping by, I always appreciate your insight.

  12. Great idea, some wisdom for the kids on what I believe they should do with whats left to them. While they have seen the will, that’s simply percentages, I should share with them what I would do if it were me (without sharing the numbers).

  13. Hello Fritz and fellow subscribers, greetings from Tampa. Another great post Fritz. I definitely have concerns about 6 & 7. Presently, we have 69% in before tax retirement assets, 28% Roth and 3% non-retirement. I am retired and 60, but my wife who is 10.5 years younger will work another 8 years. With her modest income working for a school district as a social worker we can stretch our taxable assets until we run out about the time my RMDs kick in. Because of her modest income we reduce her taxable income down significantly because of maxing out her 403B and deductions for healthcare, my alimony payments and married filing jointly standard deduction. The delta between the taxable income and the 12% tax rate of $77,400 is what I rollover to claim as taxable income. We are careful to harvest LT Cap Gains and qualifying dividends to our taxable investments so that we are below the MFJ threshold of $78,500, and thus, not having to pay tax. We factor in our taxable dividends that are not qualifying as part of income. This results in an average tax rate of 7-9% until my wife retires and would result in a shift to 53% Roth by the time my RMDs kick in while greatly minimizing taxes. Of course, I managed this carefully on a monthly basis and do not make the rollover until I know what mostly like will be my taxable income in December. Moreover, this is depended on current tax laws which can change and if I decide to get a gig job.

    As far #7, after 25 years in healthcare administration, primarily in oncology care, I have seen firsthand cancer patients lose all of their wealth fighting this dreadful disease because they have lost their job in the process or because they had inadequate insurance. Therefore, it is imperative that healthcare costs and adequate insurance is factored in everyone’s retirement budget before Medicare kicks in. As a rule of thumb, one out of three will get cancer, and there is a 40% probability of succumbing to the disease.

    1. Eduardo, congrats on your execution of a very sound before-tax conversion strategy. Yes, 69% is frighteningly high, but you have a plan and you’re working it down as efficiently as possible. Well done. Also, thanks for your firsthand reminder of the realities of cancer. I can’t imagine anyone going without health insurance, in spite of the huge expense prior to Medicare. It’s simply not worth challenging the odds. Thanks for a great comment.

        1. Found it Frank. Its call the IRS Joint Life Tables. I have updated my pro formas and it does help reduce our tax burden. Thanks.

  14. Hi Fritz,
    Some of the does not really apply to me…like SS which I will not receive…but the last one is SO important. We lived through this with our parents and it was vital to have all that info accessible and up-to-date.
    Time to update ours. I like your idea of putting it on the January calendar.

    We went over and over and over our numbers before retiring. Our pension is our pension (which covers all our needs and some of our wants), with modest COLAs over time…but we are weighing when to start tapping our 403b…we are front loading our retirement bucket list so we do it while we have our health and these things take $$$.

  15. Fritz,
    You’re doing great work sharing these tips. This type of information needs to be shared widely and read by all retirees, even if they have financial advisers they “trust”. Safe investing of a lifetime’s worth of savings cannot be completely outsourced to anyone in exchange for a 1% management fee.

  16. We are “guilty” of #6. Past 2 years we took out $25K each from our 457 accounts. This year, we are going to do a Roth conversion–up to the top of the 25% tax bracket.

    I turn 70-1/2 in 2023 and hubby turns 70-1/2 in 2024. Question is whether we match how much we take out of our similarly valued 457 accounts. To maximize how much I am able to shrink my 457 (and upcoming RMDs) should I take out more now and let hubby do more Roth conversion in the extra time that he has?

    1. Donna, it sounds like you’re doing what you can to minimize the RMD bite. Theoretically, I would agree that it would seem to make sense to have you do the larger conversion from your account since you’ll reach the RMD deadline a year before hubby. Good thought.

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