15 Retirement Mistakes to Avoid This Year

Between a falling stock market and sky-high inflation, it's been a rough year for retirees. Expenses are rising faster than normal, and savings -- at least in the stock market -- are down.

Still, there are things you can do to protect your savings and improve your financial situation, and there are also mistakes you want to avoid. Keep reading to see 15 retirement pitfalls you'll want to avoid this year.

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If there was a year to take advantage of tax losses, it's now. While taking losses in your stock portfolio is never fun, at least you can use those losses to reduce your tax bill by canceling out capital gains.

There's a good chance you own a few stocks that have lost money, and you can probably save on taxes by selling them. If you think they might make a comeback, all you have to is wait 30 days to buy it again, according to the wash sale rule.

ALSO READ: What Is Tax Loss Harvesting?

Consumer prices over the past year have soared, up 8.3% as of August, according to the U.S. Bureau of Labor Statistics. Every category the agency tracks is up by at least 5%, and some expenses like energy are up substantially.

Gasoline prices have risen 26%, electricity has increased 16%, and even food prices are up 11%. If you're living on a fixed income and spending according to a budget, you'll need to adjust it for higher prices.

With the labor market tight in so many industries and the economy facing uncertainty, it might be a good idea to stay at your job, even if it's just part-time. If your industry is being impacted by labor shortages, you might be able to negotiate a raise or other benefits.

If you feel secure with your savings, quitting your job could work for you, but if you're in the labor market now, this looks like a good time to stay in.

2022 is also a good reminder of why retirees should be diversified with their stock holdings. While tech stocks boomed in 2020 and 2021, this year they've fallen flat. Meanwhile, energy stocks have soared over much of this year after plunging earlier in the pandemic.

As a retiree, you want a consistent source of income and a stable portfolio, so diversification, or simply just owning an index fund, may be the best way to go.

ALSO READ: Understanding Portfolio Diversification

A retirement investing portfolio is typically made up of a mix of stocks and bonds, but both of those asset classes tend to underperform in an inflationary or rising interest rate environment. Stocks fall as investors get nervous about a potential recession and rotate into bonds to capture rising interest rates. Existing bond prices also fall as yields rise, meaning existing bonds are worth less.

To combat the interest rate risk, it's worth diversifying into areas like real estate, gold, or Treasury Inflation-Protected Securities (TIPS), a type of bond with principal tied to the rate of inflation.

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Another good way to protect yourself against inflation is with dividend stocks. While dividend stocks have still mostly fallen this year, most of them have continued to pay dividends, which is the most important part for income investors. In fact, some dividend stocks provide most of their returns in dividends so a declining stock price matters less than you might think for these stocks.

Defensive dividend stocks also tend to outperform in recessions as well. Take a look at the list of Dividend Aristocrats for a few reliable dividend stocks in tough times.

If you were considering taking out a home equity loan, a personal loan, borrowing on your credit card, or using another form of debt, it may not be the best time to do so.

With interest rates rising and the benchmark fed funds rate expected to go up another 75 basis points this week, variable-rate loans are getting more expensive. That means retirees should think carefully about taking out a loan.

ALSO READ: The 3 Worst Types of Debt to Take Into Retirement

You can start collecting Social Security at any age between 62 and 70, but the longer you wait, the higher the benefit will be.

Therefore, it's generally in your best interest to delay collecting benefits if you can wait. Next year could be a good year to start collecting, however, as benefits are expected to go up approximately 8% in 2023 because the cost-of-living adjustment (COLA) is pegged to inflation.

Seniors can take advantage of tax breaks like an increased standard deduction or you may qualify for the elderly tax credit simply by being above the age of 65 and having your income below a certain threshold.

Many of these deductions and credits should be applied automatically, but others you'll have to take yourself. If, for example, you start a side business as a retiree or continue to work and want to make retirement contributions, you'll have to take those deductions yourself.

When you're making your retirement contributions, it's a good idea to put some in Roth vehicles like a Roth IRA or a Roth 401(k). Roth retirement accounts differ from traditional ones because you pay taxes on the contribution when you make it so you can withdraw the income tax-free in retirement.

For retirees, a Roth account can be a great way of giving you some control over your tax bill at the end of the year.

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Moving is popular in retirement, but not every retiree can or should move. Some have family ties nearby, while others may prefer to stay in the place they've spent their working years.

However, if you're living in a high-tax city or state, it may be a smart financial move to go to a lower-tax area. You can reduce your property tax, income tax, and sales tax, as well as live in a state where there are no taxes on Social Security.

ALSO READ: How to Minimize Taxes in Retirement

Housing is the biggest expense for most retirees, as it is for working-age Americans. Not only do mortgage payments add up, but having too much house can lead to other costs like increased utilities and repairs.

At a time when prices for electricity and energy are soaring and real estate prices have jumped, it may be an especially good time to downsize your home.

After housing, healthcare is one of the biggest costs you'll face in retirement. While Medicare will cover much of your typical medical expenses, you may want to have supplemental insurance or plan for procedures that Medicare won't cover, including dental, vision, and hearing aids.

You also may need long-term care, which is expensive, so it's a good idea to get a long-term care insurance policy.

If you need money before you reach retirement, borrowing from your retirement account may seem like an easy way to get it, but be careful. Not only are you borrowing from your future self but you'll also pay a 10% tax penalty. You can withdraw from your Roth contributions with no tax penalty, however.

Instead of tapping your retirement savings, consider another option like a home equity loan, personal loan, or a side hustle to give you some extra cash.

ALSO READ: What Is a 401(k) and How Do They Work?

With inflation rising as fast as it has in 40 years, retirees are looking forward to a big increase next year, but the time lag in the Social Security COLA increase is one reason why you want to diversify your income in retirement.

That may be through dividend payments, selling stocks in your retirement account, a part-time job, or even renting part of your home on a short-term rental site like Airbnb.

Having multiple sources of income is key to managing your retirement through challenging economic times.

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Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

With an 8% Social Security increase coming for retirees and a chance for the stock market to rebound, 2023 could be a better year than 2022. Additionally, interest rates for bank deposits should eventually rise, giving savers another way to win in the current economy.

Though inflation seems to be sticky for now, the economy is like the weather: It's always changing, and that's good news after a year like this.

Jeremy Bowman has positions in Airbnb, Inc. The Motley Fool has positions in and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.