Please ensure Javascript is enabled for purposes of website accessibility

5 Common but Avoidable Retirement Mistakes

By Maurie Backman – Feb 18, 2020 at 8:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many seniors make these errors -- but you don't have to.

The moves you make leading up to retirement could dictate how well you fare financially as a senior. But if you fall victim to the following blunders, you may find yourself cash-strapped and unhappy once your time in the workforce comes to an end. Thankfully, these mistakes are easily avoidable -- if you educate yourself on how to steer clear of them.

1. Claiming Social Security at the wrong time

Your Social Security benefits are calculated based on how much you earned during your 35 highest-paid years in the workforce, and you can claim that monthly benefit in full once you reach full retirement age. That age is either 66, 67, or somewhere in between, depending on your year of birth. However, you're allowed to claim Social Security before reaching full retirement age, and doing so might seem like a good idea, since it means getting your hands on your money sooner. But for each month you opt to collect Social Security before reaching full retirement age, your monthly benefit gets reduced, up to a maximum of 30%.

Want to avoid a hit on benefits? Commit your full retirement age to memory and wait until you reach it to file for Social Security. It's as simple as that.

Serious older man wearing an orange sweater while standing against black background

IMAGE SOURCE: GETTY IMAGES.

2. Underfunding your IRA or 401(k)

There's no magic retirement savings number that guarantees financial security as a senior. But as a general rule, you should expect to need about 10 times your ending salary in savings by the time your career wraps up. That way, you're more likely to have enough money to pay your expenses without worry.

Want to avoid a shortfall during retirement? Start funding your 401(k) or IRA from a young age. If you contribute $400 a month to a retirement plan starting at age 27, and you retire at 67, you'll wind up with $958,000, assuming your portfolio generates an average annual 7% return during that time (which is doable with a stock-heavy portfolio).

3. Not knowing what healthcare will cost you

You may be used to certain healthcare bills while you're a member of the workforce. But once you retire, you may be shocked to see your medical expenses climb substantially, especially when you account for Medicare premiums, deductibles, copays, and noncovered services. In fact, cost-projection software provider HealthView Services estimates that the average healthy 65-year-old couple today will spend a whopping $387,644 on healthcare throughout retirement.

Want to avoid getting caught off guard? Read up on Medicare, but also set aside extra funds to cover your future healthcare costs. If you contribute to a health savings account while you're working, you'll have the option to invest that money and carry it into retirement to use as a dedicated means of paying for medical care.

4. Not planning for long-term care

And estimated 70% of seniors aged 65 and over will require long-term care in their lifetime, and the costs involved could be astronomical. In fact, here's what those costs look like today, on average:

  • $48,612 a year for an assisted living facility
  • $52,624 a year for a home health aide
  • $90,155 a year for a shared nursing home room; $102,200 a year for a private room

Want to avoid struggling financially if the need for long-term care arises? Buy long-term care insurance. If you apply in your 50s, you're more likely to get approved, and at a competitive rate, making your premiums more affordable.

5. Forgetting about taxes

Many people assume that seniors get a tax break on most, or all, of their income. The reality is that unless you house your savings in a Roth IRA or Roth 401(k), your retirement plan withdrawals will be considered taxable income. The same holds true for pension income (most of the time), income from a part-time job, bank account interest, and investment gains in a traditional (nonretirement) brokerage account. Furthermore, unless Social Security is your only source of retirement income, there's a good chance some or most of your benefits will be taxed as well.

Want to avoid a tax headache? Understand what your IRS liability will probably look like in retirement and factor taxes into your budget.

It's easy to goof up in the course of your retirement planning. The good news? These common mistakes can all be easily avoided, and if you manage to sidestep them, you'll spare yourself the financial stress so many seniors ultimately grapple with.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.