Common Retirement Mistakes and How to Avoid Them

By Chris Palabe, CFS®, AIF®

After years of dedicated saving, many retirees might feel uneasy about the idea of using their portfolios for income. Questions like when to initiate withdrawals or how much to take, and the fear of outlasting your savings can be valid concerns. However, concentrating exclusively on this one aspect of your overall strategy may lead you to overlook other threats to your retirement plan. Read on as we explore 5 common mistakes retirees make along with strategies to avoid each one.

1. Overspending in Retirement

Do you know what you will do with your newfound freedom in retirement? Many people start by pursuing all the things they didn’t get to do while working—traveling the world, picking up a new hobby, remodeling their home, and the list goes on.

But many people underestimate the amount of money they’ll spend in those first few years of retirement. With so much extra time on your hands, it’s easy to make a lot of little purchases that add up to a lot over time. 

If you want to avoid this mistake, with the help of an advisor, create a retirement plan that includes a withdrawal rate that will stretch your money for as long as possible.

2. Underestimating Healthcare and Long-Term Care Costs

Retirees receive Medicare after age 65, but most of the time, this isn’t enough to cover chronic healthcare needs in retirement. For example, did you know dental, basic vision, over-the-counter medication, and long-term care are not covered by Medicare? 

The average couple at age 65 will spend $315,000 after tax on medical expenses. (1) What’s more, the real retirement enemy often comes in the form of long-term care costs. Nearly 70% of retirees will need some form of long-term care (2) during their lifetimes, and with average long-term care costs (3) hovering around $315 per day or $9,584 per month for a private room in a nursing home, it’s critical for you to have a plan in place to cover these expenses. 

First, cautiously watch your spending in retirement to ensure there is a financial margin in place to protect you when larger medical bills hit later in life. And when choosing your health insurance for retirement, make sure you understand all Medicare options and supplements and work with an experienced professional to help you evaluate your options. Finally, explore your long-term care coverage options, such as traditional long-term care insurance, life insurance with a long-term care rider, and annuities with long-term care riders. The earlier you get coverage, the better, since the older you get, the higher your cost for a long-term care insurance policy will be and the greater the likelihood of your application being denied.

3. Overreacting to Stock Market Volatility 

Retirees usually want to play it safe in the stock market, by investing conservatively and safeguarding their nest egg as much as possible. But when you play it too safe, your savings can’t keep up with inflation and you end up losing money down the line. With inflation hitting 3.7% in September 2023, (4) most retirees can’t afford to avoid the stock market volatility that comes with investing at least a portion of their savings in growth assets.

Since your retirement may last anywhere from 20 to 30 years—as much time as you’ve spent in the workforce—don’t get caught up in investing too conservatively just to avoid short-term volatility. When your portfolio is too conservative, inflation becomes the biggest threat to your assets. 

4. Claiming Social Security Too Early

Don’t assume it’s best to start collecting Social Security at age 62 (or at full retirement age, for that matter). If your full retirement age is 66, for example, you could receive a 32% increase in monthly benefits (5) by waiting to collect Social Security until age 70. This means if your standard benefit amount is $1,500 per month, you could receive $1,980 by waiting four more years. This equates to thousands of extra dollars over the course of your retirement.

When deciding when you should start collecting Social Security, consider the size of your nest egg, your retirement date, and the current state of your health. Calculating when to claim your benefits is both an art and a science. If you need help, reach out to a trusted financial advisor who can help you run the numbers.

5. Miscalculating Taxes on Retirement Income

Your retirement accounts are all taxed differently. If you don’t have a strategic withdrawal plan in place, you could end up with a large tax bill at the end of the year. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a tax plan can help you strategically withdraw from your various retirement accounts and minimize your tax liability. 

Speak with a financial planner or tax advisor about creating a tax-efficient distribution strategy for retirement. This professional can look at your tax bracket, retirement accounts, and Social Security to help you withdraw money in the most tax-efficient way. 

A Partner to Help You Plan

No one can steer clear of every mistake, but that doesn’t mean we shouldn’t prepare to minimize the bumps on the road to a satisfying retirement. At Palabe Wealth, we have the experience to guide you in wealth management while avoiding the expensive missteps discussed above, which, regrettably, happen far too often in retirement. As your companion on your retirement journey, we collaborate to establish a retirement plan and formulate a tax-efficient distribution strategy that preserves more of your wealth. 

To discover more about our services and how we can support you toward a comfortable and stress-free retirement, please reach out to us today. Schedule a 15-minute introductory phone call, or you can reach us at 847-249-6600 to learn if we are the right fit for your financial goals. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

This material was prepared for Palabe Wealth Inc.’s use.

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(1) https://www.cnbc.com/select/how-much-expect-to-spend-on-medical-expenses-in-retirement/

(2) https://www.cnbc.com/2021/08/26/most-retirees-will-need-long-term-care-these-are-ways-to-pay-for-it-.html

(3) https://www.genworth.com/aging-and-you/finances/cost-of-care.html

(4) https://www.cnbc.com/2023/10/12/heres-the-inflation-breakdown-for-september-2023-in-one-chart.html

(5) https://www.ssa.gov/benefits/retirement/planner/1943-delay.html