For many Americans approaching retirement, the path to financial security can feel like navigating a complex maze.
Even with substantial savings, making the wrong moves could jeopardize the retirement lifestyle you've worked so hard to achieve.
Making serious retirement missteps can have an exponential impact - the bigger your nest egg, the more costly the biggest retirement mistakes can become.
As a team of financial advisors who have guided hundreds of clients through retirement planning, we've witnessed firsthand how certain mistakes can significantly impact your financial future.
Before you keep reading, be sure to download our free retirement cheat sheets to potentially help you potentially avoid massive mistakes.
Here's what you need to know about the biggest retirement mistakes.
Key Takeaways
Proper tax diversification across retirement accounts can help minimize your tax burden in retirement
Investment allocation should align with your specific retirement goals, not generic age-based rules
Having a comprehensive retirement income plan is crucial for maintaining your lifestyle
Healthcare costs, including long-term care, need dedicated planning
Regular portfolio rebalancing and tax-loss harvesting can optimize your retirement savings
Avoid overly aggressive return assumptions on your retirement portfolio
The 10 Biggest Retirement Mistakes to Avoid
1. Underestimating Your Retirement Needs
Meet Sarah and John, both 62, who thought their $2 million portfolio would easily sustain their desired $160,000 annual retirement lifestyle. They didn't account for inflation, healthcare costs, or the potential impact of market downturns early in retirement.
"One of the most common mistakes I see is people underestimating their retirement spending needs," says Scott Hurt, CPA, CFP® at Covenant Wealth Advisors. "When we analyze a client's current lifestyle and factor in inflation and healthcare costs, the actual number needed for a comfortable retirement is often higher than their initial estimate."
The reality is that retirement spending isn't static, but rather follows distinct phases. During the "Go-Go" years of early retirement, many retirees spend more on travel, hobbies, and leisure activities.
This typically transitions into the "Slow-Go" years of mid-retirement, where spending moderates and focuses more on routine activities.
Finally, the "No-Go" years of late retirement often see lower activity costs but potentially higher healthcare expenses.
Consider inflation's impact on your long-term plans. At just 3% annual inflation, $100,000 of today's expenses will require $180,611 in 20 years to maintain the same purchasing power.
This means your retirement portfolio needs to grow not just to provide income, but to preserve your buying power over time.
To avoid this mistake, create a detailed retirement budget that includes both essential and discretionary expenses. Factor in periodic large expenses like vehicle replacements and home maintenance, and use conservative inflation estimates in your planning - typically 2-3% for general expenses and 5-6% for healthcare costs.
Most importantly, build in a buffer for unexpected expenses and market volatility.
2. Ignoring Tax Diversification
Many high-net-worth individuals make the costly mistake of having most of their retirement savings in tax-deferred accounts like 401(k)s and traditional IRAs.
Consider Michael, a former executive who accumulated $3 million in his 401(k). When Required Minimum Distributions (RMDs) kicked in at 73, he was forced to withdraw more than he needed, pushing him into a higher tax bracket and increasing his Medicare premiums.
Tax diversification involves strategically positioning your assets across three types of accounts.
Tax-deferred accounts like traditional IRAs and 401(k)s are taxed at withdrawal.
Tax-free accounts, such as Roth IRAs, incur no tax on qualified withdrawals.
Taxable accounts, like brokerage accounts, are subject to capital gains taxes.
This diversification provides flexibility to manage your tax bracket in retirement and helps reduce the impact of RMDs.
One effective strategy is implementing Roth conversion ladders during lower-income years.
This approach, combined with tax-loss harvesting in taxable accounts and strategic timing of Social Security benefits, can significantly reduce your overall tax burden in retirement.
For those in high tax brackets, municipal bonds can provide tax-free income while maintaining portfolio diversification.
3. Improper Asset Allocation
"Your investment allocation should be based on your specific income needs and risk tolerance, not just your age," explains Adam Smith, CFP® at Covenant Wealth Advisors. "We've seen clients following the old '100 minus your age' rule for stock allocation, which often doesn't align with their actual retirement goals and risk capacity."
A different approach involves income tiering, where investments are matched to specific time horizons.
Short-term needs (1-3 years) are covered by cash and short-term bonds
Medium-term needs (4-10 years) utilize a balanced mix of stocks and bonds.
Long-term needs (10+ years) can be met with more growth-oriented investments.
Many retirees make the mistake of over-concentrating in "safe" investments like bonds, potentially sacrificing long-term growth.
Others maintain too aggressive a portfolio near retirement or fail to account for pension and Social Security as part of their "bond" allocation.
The key is finding the right balance that aligns with your specific goals and risk tolerance while maintaining adequate diversification across asset classes, sectors, and geographies.
4. Neglecting Healthcare Planning
Healthcare costs represent one of the largest expenses in retirement. According to Fidelity's latest research, an average 65-year-old couple retiring today might need approximately $315,000 saved for healthcare expenses in retirement.
This substantial figure often catches retirees off guard, particularly those who assume Medicare will cover all their healthcare needs.
Understanding Medicare coverage is crucial for effective healthcare planning. Medicare Part A covers hospital insurance, but comes with deductibles and coverage limits that need to be factored into your planning.
Part B handles medical insurance, requiring careful premium planning and understanding of coverage gaps.
Part D addresses prescription drug coverage, with various plans offering different levels of coverage for medications.
One of the most significant decisions retirees face is choosing between Medicare Advantage and Medigap supplemental coverage. Each option has distinct benefits and drawbacks that need to be evaluated based on your specific health needs and financial situation.
For example, Medicare Advantage plans often offer additional benefits like dental and vision coverage, but may restrict you to specific provider networks.
Long-term care represents another critical aspect of healthcare planning that many retirees overlook. Traditional long-term care insurance, hybrid life insurance/long-term care policies, and self-funding strategies each offer different approaches to addressing this potential need.
The choice between these options depends on factors like your health history, family longevity, and overall financial resources.
5. Poor Social Security Timing
Social Security timing can impact your retirement income by hundreds of thousands of dollars over your lifetime.
While you can begin taking benefits at age 62, your monthly benefit amount increases significantly for each year you delay up to age 70. This decision requires careful analysis of your specific situation rather than following general rules of thumb.
For married couples, the timing decision becomes even more complex. Coordination of benefits between spouses can maximize lifetime income, particularly when considering survivor benefits. A higher-earning spouse might choose to delay benefits until age 70 to maximize the survivor benefit for their partner, while the lower-earning spouse claims earlier to provide income during the delay period.
Life expectancy plays a crucial role in this decision. Family health history, current health status, and lifestyle factors should all influence your claiming strategy. In practice, we often see that the break-even point – where delayed benefits overcome the advantage of claiming early – typically occurs in the late 70s or early 80s.
However, this analysis should also consider factors like inflation protection and the tax implications of different claiming strategies.
6. Inadequate Risk Management
Market volatility can significantly impact your retirement savings, particularly in the early years of retirement.
This phenomenon, known as sequence of returns risk, occurs when negative market returns in the early years of retirement, combined with ongoing withdrawals, can permanently impair a portfolio's ability to provide lasting income.
Effective risk management starts with understanding your true risk capacity – not just your emotional tolerance for market fluctuations, but your actual ability to withstand market downturns while maintaining your lifestyle.
This may involve creating a dynamic asset allocation strategy that adjusts based on market conditions and your changing needs.
Protection strategies might include maintaining adequate cash reserves to cover several years of expenses, reducing the need to sell investments during market downturns.
Some retirees benefit from incorporating guaranteed income sources through carefully selected annuity products, while others might use options strategies or structured products for downside protection.
Regular portfolio stress testing can help ensure your risk management strategy remains effective. This involves modeling how your portfolio might perform under various market scenarios and adjusting your approach accordingly.
Working with a financial advisor can help develop and maintain these strategies while avoiding emotional decision-making during market volatility.
7. Overlooking Estate Planning
Estate planning extends far beyond creating a simple will. A comprehensive estate plan integrates seamlessly with your retirement strategy while protecting your assets and ensuring your legacy wishes are fulfilled.
This becomes particularly important for high-net-worth individuals who need to consider estate tax implications and complex family dynamics.
Modern estate planning must address both traditional and digital assets. While many retirees focus on distributing physical property and financial accounts, digital assets like cryptocurrency, online accounts, and digital businesses require specific handling instructions. Additionally, the rise of social media has created new considerations for managing your digital legacy.
Advanced planning techniques like grantor trusts, family limited partnerships, and charitable giving strategies can help reduce estate tax exposure while accomplishing your legacy goals.
Regular reviews of beneficiary designations, powers of attorney, and healthcare directives ensure your plan remains aligned with your wishes and compliant with changing laws.
8. Not Planning for Long-term Care
The reality of long-term care needs is stark: according to the U.S. Department of Health and Human Services, someone turning 65 today has a 70% chance of needing long-term care services.
Despite these statistics, many retirees lack a concrete plan for addressing this potential need.
Traditional long-term care insurance policies have evolved significantly in recent years.
New hybrid policies combining life insurance or annuity benefits with long-term care coverage offer more flexibility and benefit guarantees than older standalone policies.
However, these policies need to be carefully evaluated in the context of your overall financial plan and premium-paying capacity.
Self-funding long-term care may require substantial assets and careful planning. We often recommend a self-funding approach with our clients at Covenant Wealth Advisors.
This strategy might involve setting aside specific investments, maintaining home equity as a funding source, or creating a dedicated long-term care savings account.
Understanding the limitations of Medicare coverage for long-term care and the requirements for Medicaid eligibility is crucial for developing a comprehensive care funding strategy.
9. Failing to Regularly Review and Adjust
A retirement plan is not a static document but a living strategy that requires regular updates and adjustments. Market conditions, tax laws, family circumstances, and personal goals all evolve over time, necessitating periodic reviews and modifications to your retirement strategy.
Annual or semi-annual reviews should encompass more than just investment performance.
Changes in tax laws can create new planning opportunities or challenges. Insurance coverage needs may shift as your circumstances change. Estate planning documents might need updating to reflect new family situations or asset holdings.
Technology and financial products continue to evolve, potentially offering new solutions for retirement challenges.
Staying informed about these developments through regular meetings with your financial advisor can help ensure your retirement plan takes advantage of appropriate new opportunities while avoiding unnecessary risks.
10. Using Overly Aggressive Return Projections
Many retirees fall into the trap of using unrealistic investment return projections when planning for retirement.
Historical market returns can be misleading, particularly when looking at specific periods like the bull market of the 2010s.
Using overly optimistic return assumptions can create a dangerous illusion of financial security and lead to poor decision-making about savings rates, withdrawal strategies, and risk management.
For example, consider David and Linda, who built their retirement plan assuming their portfolio would generate consistent 10% annual returns based on the S&P 500's historical average. This led them to believe they could safely withdraw 6% of their portfolio annually while maintaining their principal. However, they failed to account for periods of market underperformance and inflation.
A more prudent approach involves using conservative return projections that account for various market environments. Monte Carlo simulations, which model thousands of potential market scenarios, can provide a more realistic picture of potential outcomes.
These simulations often suggest using more conservative return assumptions - perhaps 4-6% for diversified portfolios - when planning for retirement.
The sequence of returns also plays a crucial role.
Even if your portfolio averages 8% returns over 20 years, experiencing poor returns in the early years of retirement while taking withdrawals can permanently impair your portfolio's ability to recover.
This is why using conservative return projections becomes even more critical as you approach and enter retirement.
11. DIY Retirement Planning
While managing your own investments might seem cost-effective, the complexity of retirement planning often requires professional expertise.
This is particularly true for those with substantial assets over $1 million or complex tax situations.
The interconnected nature of investment management, tax planning, estate planning, and risk management demands a coordinated approach that can be difficult to achieve on your own.
Professional advisors at Covenant Wealth Advisors bring not just expertise but also objective perspective to your retirement planning.
We can help prevent emotional decision-making during market volatility and provide valuable perspective based on experience with numerous client situations.
For example, while you might face a particular retirement decision once in your lifetime, an experienced advisor has likely helped hundreds of clients navigate similar situations.
The value of professional advice often extends beyond investment returns. Tax-efficient withdrawal strategies, estate planning techniques, and risk management approaches have the potential to add significant value to your retirement plan.
A fiduciary advisor who puts your interests first can help coordinate these various aspects of retirement planning while providing accountability and regular review of your progress toward your goals.
While DIY financial planning can be a good start, we’ve encountered countless mistakes that could have been avoided had the individual reached out for advice.
So where do you start? We recommend scheduling a free retirement assessment from our firm. You'll received a personalized plan designed to hit many aspects of your retirement.
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FAQs
Q: How much do I really need to save for retirement?
A: While there's no one-size-fits-all answer, many retirees need between 70-100% of their pre-retirement income to maintain their lifestyle. A couple planning to spend $100,000 annually (beyond social security, pensions, and other sources of income) in retirement may consider aiming for a portfolio of $2.5-3 million, assuming a conservative 4% withdrawal rate. However, your specific number depends on many complex factors and your withdrawal rate may vary drastically depending upon:
Your desired retirement lifestyle and location
Expected healthcare costs and insurance premiums
Debt obligations and mortgage status
Expected Social Security and pension income
Legacy goals and charitable giving plans
Inflation expectations over your retirement horizon
Life expectancy
Q: When should I start taking Social Security benefits?
A: While you can claim benefits as early as age 62, each year you delay until age 70 increases your benefit by approximately 8%. Your optimal claiming age depends on several key considerations:
Your health status and family longevity history
Whether you're married and your spouse's claiming strategy
Your other sources of retirement income
Current employment status and earnings
Tax implications of different claiming ages
A married couple with significant age or income differences might benefit from a strategic claiming approach where one spouse claims early while the other delays to maximize lifetime benefits.
However, we have seen that timing strategies can differ significantly depending upon your situation. That's why it's so important to get advice from an pro.
Q: How can I minimize taxes in retirement?
A: Tax efficiency in retirement requires a multi-faceted approach. Here are key strategies to consider:
Strategically withdraw from different account types (tax-deferred, Roth, and taxable) to manage your tax bracket
Implement Roth conversions during lower-income years before Required Minimum Distributions begin
Use tax-loss harvesting to offset capital gains and up to $3,000 of ordinary income
Consider municipal bonds for tax-free income in taxable accounts
Time your charitable giving, potentially using Qualified Charitable Distributions from IRAs
Manage your Modified Adjusted Gross Income (MAGI) to minimize Medicare premiums
Conclusion
Avoiding these 11 biggest retirement mistakes requires careful planning and regular monitoring.
While the challenges might seem daunting, working with experienced financial professionals can help you navigate these potential pitfalls and create a more secure retirement future.
If you would like me or my team to just do your retirement planning for you, click here.
About the author:
CEO and Senior Financial Advisor
Mark is the CEO of Covenant Wealth Advisors and a Senior Financial Advisor helping individuals age 50+ plan, invest, and enjoy retirement without the stress of money. Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.