Since the financial safety net Social Security became law in 1935, Americans have used its benefits as a basis for helping to plan for their retirement. But income from the program doesn’t go very far – and even those who think they have retired comfortably can still make missteps.
To assemble a list of the biggest mistakes you can make in retirement, 24/7 Tempo gleaned information from sources such as the Social Security Administration, Investopedia, and other financial online sources.
Careful planning involving saving through programs such as employee-sponsored 401(k)s and individual retirement accounts (traditional or Roth IRAs) helps Americans to prepare for a comfortable retirement. Once they’ve completed their work life, Americans still need to navigate the sometimes jagged shoals of retirement. Retirement planning doesn’t necessarily stop once you have retired. (See what it costs to retire comfortably in every state.)
Among the issues to prepare for is an unexpected health episode. Retirees should also consider funds for long-term care; more than half of Americans will need some form of assisted living after they retire.
Retirees also need to bone up on their inflation math. Though Social Security benefits are indexed for inflation – and its recipients will likely see another significant increase in their checks starting in January of around 3.2%, according to Senior Citizens League calculations – retirees need to factor in inflation for everyday costs. Experts also say that among the mistakes retirees make is failing to take into account that Social Security benefits are taxed.
In addition, some people neglect to reduce or expunge their debts before retiring, and continuing to pay them off can eat into savings of those on a fixed income. (Here’s a look at American credit card debt every year since 1986.)
Not understanding how retirement taxes work
401(k) contributions are pre-tax dollars. If you withdraw a portion of your balance or cash it out completely before you are 59½, the IRS will withhold 20% for income tax and furthermore assess a 10% penalty when you file your taxes – unless you qualify for a hardship exemption. After the cutoff age, you’ll still have to pay taxes on what you withdraw, based on your current tax bracket, but no penalty will be assessed. Note, though, that as of this year, you must begin to take at least a minimum amount out of your 401(k) annually, or risk a 50% IRS penalty. The money contributed to a traditional or Roth IRA (individual retirement account), on the other hand, has already been taxed and can be withdrawn without tax penalty as long as you’re over 59½.
Not factoring in health-care expenses
Medical care will become a bigger expense as you get older. You need to factor in your health history as well as that of your family as you enter your golden years.
Failing to plan for long-term care
Long-term care refers to residence in an assisted living facility or nursing home, or the hiring of an in-home aide to help with everyday living. The Department of Health and Human Services estimates that more than half of all American seniors turning 65 will need some form of long-term care, and retirees should prepare for those possible costs.
Relying on Social Security benefits
In 2023, the average Social Security retirement benefit for a retired worker is $1,837 a month, according to the Social Security Administration. Even though you’ve been paying into the fund your whole working life, you don’t get all of it back. And your monthly benefit is taxed. Even though the amount increases because of cost of living adjustments each year (tied to the rate of inflation), you need to provide for other forms of income to maintain your lifestyle.
Failing to do the inflation math
Use an inflation calculator to determine how much money you will need in retirement. Inflation was less of an issue before the pandemic. July and August inflation reports this year suggest next year’s Social Security Administration cost-of-living adjustment, which is tied to the inflation rate, will likely be around 3%, according to the AARP. That rate rose 8.7% in 2023, the largest since 1981. The biggest adjustment was in 1980 at 14.3%.
Carrying debt
Experts suggest that you pay off,or at least pay down, any large outstanding debts before you retire.
Taking Social Security too early
Social Security benefits accrue the longer you wait to file, topping out at age 70. Although you can file as early as 62, you will receive reduced benefits. Full retirement occurs at 66 or 67, depending on when you were born. If your full retirement age is 67 and you start taking your retirement benefits at 62, your monthly benefit amount will be reduced by about 30%. Your benefit can climb by as much as 8% a year until you get to 70.
Lacking a financial plan
Not having a retirement plan is a major mistake. You need to figure out how much money you need to set aside for retirement and create a plan that factors in your expected life span, your health, where you plan to live, and the lifestyle you’d like to enjoy.
Thinking you’ll want to work during retirement
If your health is good, you may want to work in some reduced capacity while in retirement. But if you’ve built up a robust nest egg, you might think twice and opt to spend more time traveling or being with your children and grandchildren.
Believing you’ll never work during retirement
Unless they have hobbies, plan volunteering, or intend to travel extensively, many retirees get restless and end up getting full-time or part-time jobs in retirement – as much just to be active and socialize as to supplement their other retirement income.
Not minding your trusts
You’ll want to pay close attention to your trusts if you plan on leaving money for your children or beneficiaries to inherit. Be sure your wishes are drafted clearly and to your satisfaction.
Burning through savings
You may gleefully enter retirement planning to use your hard-earned savings for traveling, house projects, or a splurge on new home furnishings or a cool car. You need to temper those impulses with the sober assessment of how long you may live, and keep money aside for health emergencies and other unforeseen occurrences.
Cashing out your pension
Fewer workers today have pensions – defined-benefit plans that provide a regular specified payment amount in retirement. For those who do, unless you need to access the money immediately such as for a health emergency, it’s best not to cash out your pension. Up to 25% may be withdrawn tax-free, but after that anything you take will be added to your income for the year and taxed at your regular rate.