Common Retirement Mistakes and How to Avoid Them

Feb 6, 2023 | Blogs/Articles

By Mike Collopy, CFP®, CIMA®

It’s impossible to go through life without making mistakes—they’re just a part of being human. In fact, we often learn from mistakes of the past to make better decisions in the future. However, when it comes to retirement, there are no do-overs. You only retire once—or at least that’s the goal.

In this major financial transition, you go from earning an income, a steady paycheck, and growing your wealth, to depending on it and trying not to outlive it. Even if you’ve been planning and saving on your own for decades, retirement is not a time to go on autopilot. To make sure things go as planned, you must make a few key decisions and take a few key actions. Let’s discuss 5 common mistakes retirees make so you can avoid them and have the best retirement possible. 

1. 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 vastly different tax impact than that same distribution from a traditional IRA, which again would have very different tax implications than if you were to take it from a joint, taxable investment account.

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 could eat away at the funds that were supposed to carry you through retirement. Creating a cohesive tax plan to generate your retirement income helps you strategically withdraw from your various retirement and investment accounts so you can minimize your tax liability over your lifetime.

2. 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 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, the current state of your health, as well as the health history of your family. 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 to make an informed decision.

3. Overreacting to Stock Market Volatility 

Retirees tend to want to play it safe in the stock market. They want to invest on the conservative side and protect 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 a staggering 9.1% in 2022, 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. Make sure to consider a healthy allocation of stocks which historically have been able to exceed inflation.

4. Underestimating Healthcare and Long-Term Care Costs

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

The average person will spend $122,000 in out-of-pocket medical expenses from age 70 to death. Even worse, 5% of those over age 70 will pay over $300,000 and 1% will pay more than $600,000. And when it comes to healthcare, 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 during their lifetimes, and with average long-term care costs hovering around $306 per day or $9,305 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, watch your spending in retirement to ensure there’s 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.

5. Not Employing a Tax Mitigation Strategy

We all know taxes are a part of life, and will absolutely be a part of your retirement. But that doesn’t mean there aren’t steps you can take to lower what you owe over your lifetime. As we’ve discussed above, your various accounts will be taxed differently, so you need a cohesive plan in terms of how and where to generate your retirement income.

You should also consider that some investments may be more suitable in one type of account versus another. For instance, should you have a bond fund (which pays out dividends on a regular basis) in your taxable account, a tax-deferred account, or in a tax-free account? If you have an investment you’d like to leave to your children, in which account should that be held? While I can’t give you a precise answer for that specific question in this blog post, I can say that those types of decisions are important if you want to lower your lifetime tax liability.

Another key component of your tax strategy should be tax diversification. Simply stated, if you have all your investments in one account type (like a tax-deferred account), you might not have any options in terms of where to take your money. And you’ll simply have to pay tax rates, whatever they are, from that account. But if you have money in accounts with different tax treatment, you can pick and choose which account you should tap—depending on the current tax legislation and your current situation. Just like you want to diversify your investments, you should also work to diversify your tax options.

We Can Help You Retire the Right Way

Retirement isn’t easy, and we know you want to get it right. At Veracity Capital, our mission is to help you make the best decisions with your money so you can retire the right way, on your terms. To learn more about how we can help, I encourage you to contact me today for a no-obligation get-acquainted meeting. You can reach out to me at 305.723.9949 or to get started.

About Michael

Mike Collopy is wealth advisor and partner at Veracity Capital. As a fiduciary who puts his clients’ interests first, always, Mike is known for providing a holistic perspective on his clients’ finances. His comprehensive process first looks at the big picture of each client’s family, health, and wealth, then drills down to provide solutions for their financial needs, concerns, and goals. He’s passionate about the science of financial planning and investing and uses that to help his clients build a strong foundation for their financial life. Mike serves career-driven individuals who need professional advice to manage their wealth and maximize their opportunities, such as corporate benefits and complicated compensation packages. He considers his clients to be like family, and strives to support them and their families as they work hard for their financial future. 

Mike has a bachelor’s degree in finance from Coastal Carolina University and an MBA from The College of Saint Rose. He is also a CERTIFIED FINANCIAL PLANNER™ practitioner and a Certified Investment Management Analyst®. When he’s not working, you can find Mike spending time with his wife and young son, often exploring the great outdoors by hiking or enjoying the beach. He likes to stay active, playing basketball and training for half marathons. Mike gives back to the community by supporting organizations dedicated to finding treatments for cystic fibrosis. To learn more about Mike, connect with him on LinkedIn.

Advisory services offered through Veracity Capital, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.