1. Not Updating Estate Plans and Beneficiaries
Retirement is a major life transition, and estate plans should reflect that. Outdated wills, trusts, and beneficiary designations can create unintended consequences. Retirement accounts pass by beneficiary form, not by what your will says. That detail catches many families off guard.
Life events like remarriage, divorce, or the birth of grandchildren can complicate matters. Failing to update documents may lead to assets going to the wrong person. It can also trigger avoidable taxes or family disputes. A simple review every few years can prevent long-term headaches.
2. Claiming Social Security as Early as Possible
It can be tempting to start collecting Social Security at 62, especially if you’re burned out or worried the system might change. But claiming early permanently reduces your monthly benefit compared to waiting until full retirement age or even age 70. For people born in 1960 or later, full retirement age is 67, and benefits can be reduced by as much as 30% if claimed at 62. That smaller check follows you for life.
On the flip side, delaying benefits increases them by about 8% per year until age 70. That guaranteed increase is hard to replicate with low-risk investments. If you live into your 80s or beyond, waiting can significantly boost your lifetime benefits. Many retirees underestimate how long they’ll live, and that’s where early claiming often backfires.
3. Carrying a Mortgage Deep Into Retirement
Some retirees choose to keep their mortgage because rates are low or they prefer liquidity. In certain cases that makes sense, especially if investments are earning more than the interest rate. But having a required monthly payment reduces flexibility in a fixed-income phase of life. That obligation can become stressful if markets fall or unexpected expenses pop up.
Retirement is often smoother when fixed costs are minimized. A mortgage payment can crowd out travel, hobbies, or helping family members. If one spouse passes away, the surviving partner may struggle to keep up with payments on a reduced income. What felt manageable during working years can feel burdensome when paychecks stop.
4. Investing Too Conservatively Too Soon
After living through market downturns, many retirees shift almost entirely to cash or low-yield bonds. While protecting principal feels safe, it introduces another risk: inflation. Over a 20- or 30-year retirement, even modest inflation can erode purchasing power dramatically. Money parked in low-yield accounts may not keep up.
A portfolio that’s too conservative can run out of steam. Historically, stocks have provided higher long-term returns than cash equivalents, even with volatility. Retirees still need growth to support decades of withdrawals. Avoiding all market risk can ironically increase the risk of running out of money.
5. Ignoring Required Minimum Distributions
Once you reach age 73 under current law, the IRS requires withdrawals from traditional retirement accounts. These required minimum distributions, or RMDs, apply to accounts like traditional IRAs and 401(k)s. Failing to take the full amount can trigger a steep penalty. That penalty is currently 25% of the amount not withdrawn, though it may be reduced to 10% if corrected promptly.
RMDs can also push retirees into higher tax brackets than expected. Large account balances mean larger mandatory withdrawals over time. Without proactive tax planning, retirees can face higher taxes on Social Security benefits and Medicare premiums. Ignoring RMD rules can turn a tax-deferred advantage into a tax headache.
6. Helping Adult Children at the Expense of Your Own Security
It’s natural to want to support your kids, whether that means co-signing loans or helping with a down payment. But dipping too deeply into retirement savings can jeopardize your own financial independence. Unlike your children, you generally can’t borrow for retirement. Once that money is spent, you don’t have decades to rebuild it.
Financial strain later in life can create tension instead of relief. If your savings fall short, your children may end up supporting you anyway. A balanced approach protects both generations. Putting your own oxygen mask on first isn’t selfish; it’s strategic.
7. Failing to Plan for Taxes in Retirement
Many people assume their tax bill will shrink dramatically once they stop working. While income may drop, retirement accounts like traditional IRAs and 401(k)s are still taxable when withdrawn. Social Security benefits can also be partially taxable depending on total income. The result is often a bigger tax bill than retirees expected.
Strategic withdrawals, Roth conversions, and timing income carefully can make a difference. Without planning, retirees may unintentionally trigger higher marginal tax rates. Taxes can also affect Medicare premium surcharges known as IRMAA. Overlooking the tax side of retirement can erode more of your nest egg than you planned.
8. Relocating Without Fully Researching the Costs
Moving to a state with no income tax sounds like a no-brainer. But taxes are only one part of the financial equation. Property taxes, homeowners insurance, healthcare access, and overall cost of living vary widely by region. What looks cheaper on paper may cost more in practice.
Lifestyle factors matter too. Being far from family or familiar doctors can create unexpected challenges. Some retirees move multiple times because the first relocation didn’t fit. Each move comes with transaction costs and emotional stress. A rushed decision can undo years of careful planning.
9. Overestimating How Little You’ll Spend
There’s a common belief that expenses drop sharply in retirement. While commuting and work-related costs disappear, other categories often rise. Travel, hobbies, and dining out can increase, especially in the early “go-go” years. Inflation continues to push everyday prices higher.
Spending patterns also shift with health changes. Home modifications, caregiving, and medical expenses can emerge later. Many retirees experience three phases: active years, slower years, and more medically intensive years. Underestimating any of them can throw off even a solid plan.
10. Relying Too Heavily on Home Equity
Your home may be your largest asset, and it’s easy to view it as a financial backstop. But accessing that equity isn’t always simple or inexpensive. Selling means relocating, and that may not be emotionally or practically feasible. Borrowing against it introduces new debt in retirement.
Tools like reverse mortgages can provide income, but they come with fees and complexities. Market conditions also affect how much equity you can actually tap. A housing downturn can shrink perceived wealth quickly. Treating home equity as guaranteed retirement income can backfire if circumstances change.
11. Underestimating Healthcare Costs in Retirement
Many Americans assume Medicare will cover most of their healthcare expenses once they turn 65. While Medicare does provide broad coverage, it doesn’t pay for everything. Premiums, deductibles, copayments, and services like dental, vision, and long-term care can add up quickly. Those gaps surprise retirees who didn’t budget for ongoing out-of-pocket costs.
Healthcare spending also tends to rise with age, especially in your 70s and 80s. Long-term care, whether at home or in a facility, is largely not covered by traditional Medicare. A serious illness can strain even a well-built retirement plan. Without a realistic estimate of medical expenses, savings can drain faster than expected.
This post Why These Retirement Choices Often Backfire was first published on American Charm.
