Many of us have a good idea of what we want retirement to look like well before that milestone arrives. But the moves we make ahead of retirement could change that picture for the worse. Here are three specific decisions that could really come back to bite you during your senior years.
1. Claiming Social Security early
You're entitled to your full monthly Social Security benefit, based on your earnings record, once you reach full retirement age. That age is either 66, 67, or somewhere in between, depending on the year you were born. The Social Security Administration will allow you to claim benefits much sooner than that -- you can sign up once you turn 62.
But for each month you file ahead of full retirement age, your benefits will be reduced on a permanent basis. That's a hit to your income you might think will be worth it, only to change your mind after the fact.
Imagine you're entitled to $1,500 a month from Social Security at age 67 (that's roughly what the average senior gets today), only you decide to sign up at 62. Doing so will reduce your monthly benefit by $450. You may be motivated to claim benefits early so you can travel, improve your home, or do other things with that money that bring you joy, but what happens later on when you realize you can't afford to lose out on $5,400 a year?
Before you claim Social Security, think about the financial impact of that decision. Holding out until full retirement age, or even longer, could put you in a much stronger position to tackle your bills for the long haul.
2. Withdrawing too much from your savings early on
Ideally, you'll enter retirement with a nice chunk of money in your IRA or 401(k). But if you make the mistake of withdrawing too much from your savings early on, you'll have less money available later on, when you might need it even more.
For years, financial experts have supported a 4% annual withdrawal rate, and while you don't need to stick to that guideline, it's a good starting point. By contrast, if you decide to remove 8% of your savings per year during the early stage of retirement so you can travel or do other things while you're younger, you'll risk a scenario where you don't have ample cash down the line.
Every dollar you remove from your savings during retirement is money you can no longer invest, so think carefully when taking IRA or 401(k) distributions, and also, spend some time crunching numbers to establish a safe annual withdrawal rate for you.
3. Hanging onto a home that's too expensive to maintain
Many seniors enter retirement with their homes paid off, so they make the mistake of assuming they'll be inexpensive to hang onto. But remember, your mortgage payment is only one expense that comes with owning a home. You'll also have to deal with property taxes, insurance, maintenance, and repairs, all of which could become more of a burden as your home ages (property taxes actually have a tendency to rise over time -- even during periods when home values decline). As such, staying in the home you lived in while you worked is a choice you might bemoan after the fact.
To make that decision, see how much of your retirement income your current home will eat up. Then, compare that to what you'll spend to downsize to a smaller one. In fact, it could even make more financial sense for you to rent a home in retirement rather than own one, because that way, you won't have to spend money on maintenance and repairs, which can be fairly unpredictable.
Sometimes, the financial decisions we think are smart end up backfiring on us. The key, therefore, is to spend a lot of time planning for retirement before diving in so you don't make a mistake you may ultimately regret.