Five Retirement Planning Mistakes That Can Come Back to Haunt You
Five Retirement Planning Mistakes That Can Come Back to Haunt You
“The most impactful retirement mistakes aren’t always dramatic. Instead, they can be simple decisions like rolling a 401(k) into an IRA too early or taking Social Security at the wrong time. This can close off options people didn’t even know they had. A short review before you make a move can help keep those doors open.” — Tyson Mavar, Financial Advisor, The Retirement Group, a division of Wealth Enhancement.
Halloween is a season for things that go bump in the night. However, in retirement planning, the scariest things are usually quieter: decisions that seem benign but can haunt you for years. While you can change direction in some cases, other choices can’t be easily reversed. Here, we look at five common mistakes that can give people a real fright as they approach retirement and outline some steps you can take to avoid them.
1. The Tax Bill That Creeps Up on You
While you may expect to pay less tax after you retire, this often depends on where you hold your savings. That’s because withdrawals from traditional 401(k) and IRA accounts are taxed as ordinary income. Additionally, those accounts are subject to required minimum distributions (RMDs), mandatory withdrawals that begin at age 75 if you were born in 1960 or later. Depending on the size of your RMDs, those distributions could push you into a higher tax bracket and potentially raise your Medicare premiums through income-related surcharges.
Social Security can add to the bill. If a single filer’s income is over $25,000 (or $32,000 for those filing jointly), up to 50% of your Social Security income will be included in your income and subject to tax. If that number rises to $34,000 when filing singly or $44,000 for joint filers, up to 85% of your benefits will be included in your taxable income.
To mitigate taxes in retirement, tax diversification is key. Using this strategy, the aim is to spread your savings into three different types of accounts:
- Tax-deferred accounts, like traditional 401(k)s or IRAs, allow you to deduct your contributions but are taxable on withdrawal.
- Taxable accounts, like brokerage accounts, include investments on which you pay taxes annually. When you sell, only your gains are taxed, often at lower long-term capital gains rates.
- Tax-advantaged accounts, like Roth accounts, allow you to make after-tax contributions. As a result, qualified withdrawals are tax-free.
Proper tax diversification gives you the flexibility to manage your taxable income in retirement. It’s this advantage that often encourages investors to use Roth conversions after they retire but before they start taking RMDs.
2. The Social Security Timing Decision That Follows You for Life
While you can claim Social Security benefits as early as age 62, the age you choose determines the size of your monthly check for the rest of your life.
For anyone born in 1960 or later, full retirement age (FRA) is 67, which is when you get your “full” benefit. By claiming at age 62, that benefit is permanently reduced by 30%. Conversely, for each year you wait to claim beyond FRA, your benefit grows by 8%, up to age 70.
Yet, while the math is compelling, waiting doesn’t always make sense. To determine the best time to claim, it’s important to take an honest look at your health. If you have a shorter life expectancy, claiming earlier could make sense, while a family history of longevity may support a decision to wait. Consider your cash flow, too. If you need additional income sooner, claiming earlier may be the right choice. A financial advisor can help you take all the potential considerations into account.
3. The Health Care Costs Lurking Around the Corner
Health care is often considered one of the largest and least predictable costs you’ll face in retirement. In fact, the Employee Benefit Research Institute (EBRI) estimates that a 65-year-old couple may need to save as much as $405,000 to have a 90% chance of covering their medical expenditures in retirement.
Notably, those estimates exclude long-term care, which Medicare doesn’t pay for. In 2025, the national annual median cost for in-home care from a non-medical caregiver was $80,080, an assisted living community cost $74,400, and a semi-private room in a nursing home was $114,975.
If you retire before age 65, you’ll also need health coverage until Medicare begins, whether through COBRA (which is typically available for up to 18 months), the ACA marketplace, or a spouse’s employer plan.
To avoid being caught off guard, it’s essential to plan ahead. If you have a qualifying high-deductible health plan (HDHP), consider a Health Savings Account (HSA), which allows you to put aside money to cover health care costs. Long-term care insurance can also play a role and is typically easier to qualify for in your 50s and 60s. Setting aside a reserve for unexpected illness also makes sense, so a large medical bill won’t force you to sell investments in a down market or take a big taxable withdrawal.
4. The 401(k) Rollover That’s More Trick Than Treat
At retirement, many retirees almost automatically roll their 401(k) into an IRA. However, this may not make sense if you retire early. In fact, if you leave your job in or after the year you turn 55, the IRS Rule of 55 may allow you to withdraw funds from your 401(k) without penalty, rather than waiting to reach the standard penalty-free age of 59½.
The rule covers only the 401(k) plan of the employer you just left and it’s not available if you move your money into an IRA. Before starting any rollover, be sure to speak with a financial advisor to find out whether you qualify for the Rule of 55 and if it makes sense for your situation.
5. The Missing Withdrawal Strategy That Leads to Sleepless Nights
Once you retire, determining how much to withdraw from your savings can become a delicate balancing act. Withdrawing too much too early in retirement could put your savings at risk. Sequence of returns risk can worsen this equation. If the market falls shortly after you retire, you may be forced to sell your investments at lower prices, putting your retirement strategy at risk and making it difficult to recover over time.
Although withdrawal strategies like the 4% rule are notionally designed to mitigate this risk, these traditional approaches sometimes fall short in today’s financial environment. This calls for more flexible approaches. Using dynamic guardrails, for instance, allows you to set a withdrawal rate with upper and lower limits, enhancing your ability to manage market volatility. Another option is to use annuities to cover your fixed costs, leaving your portfolio to fund discretionary spending.
Keep in mind, too, that an overly conservative portfolio may not keep pace with inflation over a long retirement. This may make a case for staying invested in stocks, depending on your risk tolerance. No matter which option you choose, the key is to determine how to sequence your withdrawals to make sure your money lasts throughout your entire retirement.
Taking the Scare Out of Retirement
The decisions you make when it comes to retirement are interconnected. The age at which you claim Social Security affects how much you can withdraw from your savings. Your withdrawals affect your tax bracket, which has an impact on your Medicare premiums. That’s why looking at them all together may help enhance your results over time and keep your only scares this season at your front door.
If you’d like help weighing the trade-offs and crafting a plan that takes your health, family, and financial goals into account, reach out to The Retirement Group. We’re here to help you meet your long-term objectives, no matter how close to or far you are from retirement.
Disclosures
This article is for general educational purposes only and should not be considered tax, legal, or investment advice. Tax rules depend on individual circumstances and can change. Consult qualified tax and financial professionals and review your plan documents before taking action.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Investing involves risk, including possible loss of principal.
Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor and affiliate of Wealth Enhancement Group®.