10 Common Retirement Mistakes and How to Avoid Them

If you are feeling less confident about your retirement prospects these days, you’re not alone.

Only 53 percent of retirees ages 62 to 75 said they were strongly satisfied with their retirement in 2022, down from 62 percent in 2020, according to a survey by the Employee Benefits Research Institute. One of the main reasons: higher inflation.

There is not much you can do about inflation, but you can improve your odds of not outliving your assets by avoiding these common retirement mistakes.

1. Taking Social Security too early.

People who qualify for Social Security can begin claiming it anytime between ages 62 and 70. For every month you delay taking it up until age 70, your payment will be permanently increased by a percentage that in the later years reaches 8 percent a year. For example, suppose you were born in 1960 or later and your benefit, based on your career earnings, would be $1,000 a month if you started taking it at age 67 (your “full retirement age”). Your benefit would be $700 a month if you began taking it at age 62 versus $1,240 a month if you waited until age 70.

This is “the best money you can have in retirement. It’s indexed for inflation and goes on as long as you live,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Unless you need the money to live on or have health problems that will shorten your life expectancy, many experts recommend holding off until age 70 to get the biggest monthly payment. “People underestimate the insurance value of having that guaranteed lifetime income,” Munnell said.

2. Retiring too early.

Every year you keep working is another year you won’t have to claim Social Security before age 70. Delaying retirement also gives you more time to save and for those savings to grow. Plus, working, even part time, “provides structure to your day, colleagues, and gives you some sense of satisfaction,” Munnell said.

Any money you earn from a job also means having to withdraw less from your retirement accounts. Having a part-time job that pays $10,000 a year would be like having an extra $250,000 in retirement assets earning 4 percent (which is equal to $10,000 of earnings a year), said Ed Slott, founder of IRAhelp.com.

3. Not planning for an earlier-than-expected retirement.

About 55 percent of retirees ages 62 through 75 retired earlier than expected, according to the aforementioned EBRI study. While some found they could afford to retire early, others had to stop working because of health problems, caregiving needs, a layoff, or an early retirement package, said Bridget Bearden, EBRI’s research and development strategist. “A common mistake, once you get to 55 or 58, is to not start regularly assessing your retirement readiness,” she added.

To help prepare for an earlier than expected retirement, estimate your future spending needs by using an online calculator, such as EBRI’s Ballpark E$timate. “It’s not just financial planning though, individuals should also consider their health, housing situation, social fabric, and interests. All these factors are important to being satisfied with life in retirement,” Bearden said.

4. Overestimating your retirement assets.

People look at their IRA or 401(k) and say, “I have $200,000.” But unless it’s in a Roth IRA or Roth 401(k), “they owe taxes on that money. The government owns some of that,” Munnell said. Don’t forget to calculate future tax payments when assessing your retirement assets and planning when you can comfortably retire.

5. Not seeing your home as a retirement asset.

Many people have an emotional attachment to their home or want to leave it to their children, but they should consider it an asset that could be sold or mortgaged to supplement their retirement income.

“If they’re in a house that is too big for them, they can sell it and move to a smaller home or to a place with a lower cost of living,” Munnell said. If you’re determined to stay in your home, taking out a reverse mortgage is one way to tap your home equity for living expenses.

6. Worrying about the wrong thing.

People in retirement worry about stock-market volatility, but the biggest risk in retirement is outliving your money. “People look at the average life expectancy and don’t realize that roughly half the people will live longer,” Munnell said.

7. Not saving more as you age.

Many people who could save more as they get older—because they’ve gotten raises, paid off a house, or are done putting children through college—don’t because they’ve put their retirement savings on autopilot, IRAhelp.com’s Slott said. As your disposable income goes up, funnel more of it into retirement savings, he said.

8. Not making catch-up contributions.

People who will be 50 or older by year end and are already contributing the maximum to an IRA or 401(k)-type account can make additional “catch-up” contributions as long as they’re still working and earning money.

In 2023, you can contribute an extra $7,500 to 401(k)-type plans (on top of the basic $22,500 limit) and an extra $1,000 to a traditional IRA or Roth IRA (on top of the basic $6,500 maximum) if you are older than 50. Note that income limits apply to Roth IRA contributions and, if you or your spouse is covered by a retirement plan at work, to deductible contributions to a regular IRA.

9. Not updating beneficiary forms. 

Make sure to update and periodically review the named beneficiaries on your retirement, insurance, and other financial accounts, especially if there has been a birth, death, or divorce in the family. This is crucial on retirement accounts because they generally will be distributed according to your beneficiary form, not what’s in your will, says Slott.

10. Thinking your tax rate will drop in retirement. 

Many people contribute to regular IRAs and 401(k) accounts while they’re working because they get a tax deduction for the amount contributed. The money grows tax deferred, but when it comes out, every dollar is taxed as ordinary income. 

That’s okay with most people because they assume they’ll be in a lower tax bracket when they’re retired. But many people are surprised to find that their tax rate is the same or higher in retirement, notes Slott.

This could happen because they have large IRAs or 401(k) accounts that generate taxable income when they’re tapped. (At age 72, you must begin taking “required minimum distributions” from these accounts, whether you need the money or not.) Or they might have investments in non-retirement accounts that throw off taxable interest, dividends, and capital gains. Or they may no longer qualify for tax deductions they got when they were working.

For this reason, Slott recommends considering contributing to Roth IRAs and Roth 401(k) plans instead of regular ones. With Roth accounts, you don’t get a tax deduction for money that goes in, but every dollar that comes out is tax free, and you won’t have to take required minimum distributions (although your heirs will). 

He also recommends converting at least some money in regular IRAs to Roth IRAs. You will pay tax on the amount converted, but tax rates today are historically low.