Retirement is an exciting time that most people look forward to throughout their working lives. However, many Americans' retirement is put in jeopardy by common financial mistakes they make once they leave the workforce. And these mistakes can have serious consequences, leading to a loss of savings and forcing people to abandon retirement and return to work. According to a Labor Force Transitions report published by the Federal Reserve Board, one-third of American retirees return to work on a full-time or part-time basis, and the majority do so because they need more income. Here are three common mistakes to avoid in retirement. 

Retirement savings plan

The best-laid financial plans can go awry if you make these mistakes in retirement. Source: Getty Images

1. Overspending

Let's start with the most obvious mistake people make in retirement: overspending. Whether it means splashing out on the car of your dreams, traveling to exotic locales, taking out an expensive golf course membership, or undertaking a major home renovation, it's easy to spend too much money in retirement. Nearly half (45.9%) of retirees spend more money in the first two years of retirement than they did when they were working, according to the Employee Benefit Research Institute. There's no problem with rewarding yourself after decades of work, but it's important that you adjust your lifestyle to the reality of living on a fixed income.

As a rule of thumb, financial experts say retirees should not deplete their savings by more than 4% to 6% a year. If, for example, you have $1 million saved, a 5% withdrawal rate per year would give you $50,000 to live on, in addition to Social Security. This is commonly known as the "4% retirement rule." While not foolproof, this rule can help you estimate how much you can afford to spend each year without jeopardizing your savings. Knowing your annual income, developing a budget, and sticking to that budget can help ensure that you don't overspend and outlive your nest egg. 

2. Being too conservative with your investments

This may sound counterintuitive, but another mistake retirees often make is being too conservative with their investments. While many financial advisors counsel people to reduce the risk of their investment portfolio once they enter retirement, the reality is that most retirees need their investments to continue growing in order to make their savings last over the long term. Not only do you need to account for inflation, unforeseen costs such as medical bills, and living longer than expected, but you could also see a depreciation in other assets, notably the value of your house. For these reasons, it may be best to keep your retirement savings invested and growing during retirement, rather than transferring all the money to conservative instruments such as bonds or certificates of deposit.

One method of determining your ideal stock allocation is to subtract your age from 110, invest that percentage of your portfolio in stocks, and invest the remainder in lower-risk investments such as bonds. For example, if you're age 65, you would invest 45% of your portfolio in stocks. By age 70, the percentage you invest in stocks should be reduced to 40%. Depending on your financial circumstances and your goals, you could decide to invest a bit more aggressively or conservatively.

While continuing to weather the ups and downs of the stock market in retirement may sound stressful, diversifying your investments and allocating the right percentage of your money to stocks can both grow and shelter your retirement savings. 

Taxes in retirement

Taxes are still an issue to be managed in retirement. Source: Getty Images

3. Making tax mistakes 

Taxes don't go away once you stop collecting a regular pay check. The reality is that taxes in retirement are often more complex, as you (rather than your employer) must ensure that the Internal Revenue Service (IRS) gets its fair share of your income. This can result in a number of tax surprises for retirees.

One of the more common mistakes retirees make when it comes to taxes is failing to withhold the right amount of tax from their pension and/or Social Security income, which can result in one big tax bill at year's end. Most retirees do not have to pay federal income taxes on their Social Security benefits. However, if you receive substantial income in addition to Social Security, up to 85% of those benefits may be taxed. (The Association of American Retired Persons has a helpful summary on Social Security and Taxes that is worth a read.)

Another common mistake retirees make is failing to take their required minimum distribution (RMD), a certain amount of money that people aged 70 1/2 or older must withdraw from their traditional IRAs and 401(k)s each year based on their age and account balance. It is also important to understand the tax treatment of IRA withdrawals. With a Roth IRA, you don't owe income tax on your withdrawals, provided the account has been active for more than five years and you're older than age 59 1/2. With a traditional IRA, withdrawals are taxed as income, and the tax rate you pay is based on your total retirement income for the year.

If you're not overly savvy about financial matters, then the best course is to work with a financial advisor on tax matters that could impact your retirement savings. And remember that tax planning at year's end is likely too late. You should have a plan in place at the start of each year to ensure that your taxes are covered and there are no surprises. If you insist on managing your own taxes, the IRS has helpful information on its website concerning tax issues impacting seniors and retirees.    

These are three of the most common financial mistakes retirees make. There are many more, including taking Social Security too soon, carrying debt into retirement, not having enough health insurance, and not planning for long-term care. Being aware of these potential problems and planning to avoid them is the best way to ensure that you have a happy and worry-free retirement.