The Retirement Mistake That Could Cost You Thousands… See More
You’ve spent decades saving diligently, contributing to your 401(k), and dreaming of the day when you could finally leave the workforce behind. You’ve attended retirement seminars, read personal finance books, and maybe even met with a financial advisor. You feel prepared—perhaps even overprepared. But what if a single oversight, a seemingly small miscalculation, could unravel years of careful planning? What if the retirement mistake you’re about to make has nothing to do with your investment choices and everything to do with a factor you likely haven’t even considered?
For countless retirees, the critical error occurs not in how they save but in how they withdraw their money. The order in which you tap into your various accounts—taxable, tax-deferred, and tax-free—could mean the difference between a comfortable retirement and running out of money prematurely.
Most people approach retirement withdrawals logically but incorrectly. They start by drawing down their regular savings and brokerage accounts, preserving their tax-advantaged retirement accounts for later. This seems reasonable—why pay taxes sooner than necessary? The problem with this strategy is that it can create a tax time bomb later in retirement.
Here’s how it happens: By leaving tax-deferred accounts (like traditional IRAs and 401(k)s) untouched initially, you allow them to continue growing. This sounds positive until Required Minimum Distributions (RMDs) kick in at age 73. Suddenly, you’re forced to withdraw large amounts from these accounts, potentially pushing you into higher tax brackets and causing your Social Security benefits to become taxable. This domino effect can also increase Medicare premiums due to Income-Related Monthly Adjustment Amount (IRMAA) surcharges.
The mistake becomes particularly costly for married couples. When the first spouse passes away, the surviving spouse must file as a single taxpayer—facing significantly lower income thresholds for each tax bracket. What was a tax-efficient withdrawal strategy for a couple can become brutally inefficient for a widow or widower.
Another common error involves underestimating healthcare costs. Many retirees budget for Medicare premiums but fail to account for dental, vision, hearing, and long-term care expenses—none of which are covered by traditional Medicare. A couple retiring today may need $300,000 or more just for healthcare expenses throughout retirement, not including long-term care.
The sequence of returns risk represents another frequently overlooked threat. Poor market performance in the early years of retirement can permanently diminish your portfolio’s longevity, even if average returns eventually recover. withdrawing 4% annually from a portfolio that loses 20% in its first year creates a very different outcome than the same withdrawal from a portfolio that gains 20%.
Many retirees also make the mistake of retiring in a high-tax state without considering relocation options. Moving to a tax-friendly state—even for just the years when you’re taking large withdrawals—could save tens of thousands of dollars in state income taxes.
Social Security timing presents another costly misstep. While you can begin collecting benefits as early as 62, each year you delay (up to age 70) increases your monthly payment by approximately 8%. For many people, delaying Social Security represents the best guaranteed return they can get anywhere—yet too many claim early out of fear or impatience.
The good news is that these mistakes are preventable with proper planning. A coordinated withdrawal strategy that balances taxable, tax-deferred, and tax-free accounts can dramatically reduce your lifetime tax burden. Roth conversions during low-income years can help manage future RMDs. Strategic charitable giving through Qualified Charitable Distributions can satisfy RMD requirements without increasing taxable income.
Healthcare costs can be managed through Health Savings Accounts (if eligible) and long-term care insurance or hybrid policies. Sequence of returns risk can be mitigated by maintaining two years of living expenses in cash equivalents and keeping a flexible withdrawal strategy.
The most valuable retirement planning often happens not in the accumulation phase but in the distribution phase. Working with a fiduciary financial planner who specializes in retirement income planning can help you avoid these costly mistakes. Sometimes a single hour of professional advice can save you years of financial stress.
Your retirement should be about enjoying the fruits of your lifelong labor, not worrying about money. By understanding these potential pitfalls and planning accordingly, you can protect the nest egg you worked so hard to build—and ensure it lasts as long as you do.