Common Retirement Mistakes That Could Put Your Plan at Risk

Retiring can feel daunting, as retirees face a myriad of potential concerns, many of which are beyond their control, such as market performance and rising supermarket prices. However, simple errors can lead to significant financial repercussions during retirement. Here are common blunders to avoid as you enter your golden years.

A crucial factor to consider is that you may have to pay income taxes on your Social Security benefits. Up to 85% of these benefits may be taxable, depending on your overall income. The tax thresholds are set at specific amounts and don't adjust for inflation, meaning more retirees are exceeding these limits each year. To estimate your potential tax liability, add half of your Social Security benefits to your adjusted gross income (AGI) and any tax-free interest earned.

If this total exceeds $25,000 ($32,000 for joint filers), taxes could be applied to up to 50% of your Social Security benefits. If the total surpasses $34,000 ($44,000 for joint filers), up to 85% of your benefits may be taxable.

If you have tax-deferred retirement accounts like IRAs, 401(k)s, or similar plans, withdrawals will be taxed as ordinary income and could trigger those Social Security taxes. To mitigate this, consider converting some of your IRA balance to a Roth IRA each year, ensuring you remain in your current tax bracket. This way, future gains will be tax-free. Be aware that converting too much at once may push you into a higher tax bracket.

Once you turn 73 (or 75 for those born after 1959), the IRS requires you to start taking required minimum distributions (RMDs) from your tax-deferred accounts. The amount is based on your account balances and life expectancy. Failing to withdraw the correct amount can result in a 25% penalty on the missed amount. Strategies to minimize taxes on RMDs include deferring Social Security and taking larger withdrawals early on to lower your taxable account balances. Roth assets are not subject to RMDs, so converting to a Roth can eliminate your RMDs.

If your retirement income isn't necessary for living expenses, making qualified charitable distributions (QCDs) from IRAs can satisfy RMD requirements without generating taxable income. While SmartAsset's RMD calculator can estimate your first RMD, a financial advisor can help plan for the tax implications of these mandatory withdrawals and minimize or eliminate them.

Inflation is another critical factor to consider. The cost of living typically increases by 2% to 3% annually, significantly impacting your retirement savings over a 20- or 30-year retirement period. Stocks are often recommended for retirees, as bond and savings account interest usually doesn't keep up with inflation. Neglecting inflation could lead to a loss of purchasing power and shorter-lasting savings.

Most individuals won't reach their full Social Security retirement age until they turn 67, but they must sign up for Medicare during the three months before or after turning 65 to avoid penalties. Medicare has various parts, and enrolling late can result in penalties ranging from 1% to 10% for every 12 months of delay. Familiarize yourself with all components of Medicare to avoid costly mistakes.

Lastly, consolidate and manage your retirement savings, including IRAs, taxable investment accounts, pensions, and 401(k) accounts. Depending on your situation, you may want to roll old 401(k)s into a single consolidated IRA or contribute to your current employer's plan to postpone RMDs. You can also consider combining several IRAs into one account or converting some of the cash to a Roth IRA.

A financial advisor can assist with account rollovers and managing your consolidated savings. Planning for retirement can be overwhelming, but starting with a budget and reviewing your assets, accounting for inflation and healthcare costs, and establishing a post-work investment strategy can make the process more manageable.