5 money mistakes to avoid in retirement

Navigating retirement can be tricky. The skills and mindset you need to build wealth are different from those you need to preserve your wealth. 

Mistake #1: Taking out too much, too soon 

You should amass enough wealth for retirement to cover expenses for about 30 years. While the average lifespan is about 78 years, it’s good to assume you will beat this average, and be financially prepared accordingly.

In order to ensure that you don’t run out of money, researchers at Trinity University discovered a helpful formula: As long as you have half your money invested in stock-based index funds, you can withdraw around 4% of the total balance each year.^[] Doing so will almost guarantee that your money will last about 30 years in retirement.

Unfortunately, many people are not aware of this. They take out too much money in their early retirement years, which puts them at risk of running out of money later on.

Mistake #2: Not withdrawing enough money 

While some may be at risk of taking out too much money too soon, others may fall on the opposite side of the spectrum, and take out too-little money in retirement, or much less than the recommended 4% per year. Research shows that the average investment portfolio of a retired person actually grows during retirement, meaning instead of spending down your money, you may actually accumulate more.^[] While this may not seem like a bad thing, don’t forget about the opportunity cost. 

People who don’t withdraw enough money in retirement are at risk of depriving themselves of incredible travel experiences and desirable luxuries, and they pass away before getting the chance to truly enjoy everything retirement has to offer. 

Mistake #3: Not accounting for healthcare expenses 

Many costs decrease in retirement. Your home mortgage may be paid off; you are no longer paying for childcare expenses or college tuition for your kids; you don’t have to invest/save as much of your income any longer; and so on. But one expense tends to rise dramatically in retirement: healthcare. 

As of 2023, you won’t be eligible for Medicare until you turn 65. This means you may have to buy healthcare from the federal marketplace, which can cost thousands of dollars per month—if not more. Even once you turn 65 and become eligible for Medicare, you’ll most likely need a supplemental insurance plan to decrease costs. 

Mistake #4: Not changing your asset allocation

Your asset allocation is the percentage of each type of investment you have in your investment accounts. Perhaps you started off your career with 90% stocks and 10% bonds, or perhaps you have 80% stocks or 20% bonds. Regardless of what you started with, you may need to change it in retirement. 

Instead of taking lots of risk by investing the vast majority of your money in stocks (or stock-based index funds), you may need to decrease this risk. 

The last thing you want is for the market to crash the year you enter retirement, which could mean losing as much as 30% of the total value of your money when you need it most. 

My point? Many people in retirement should re-examine their asset allocation. The general rule is to decrease the percentage of stocks and increase the percentage of bonds and cash. This will allow you to take less risk and “stabilize your portfolio.” 

Mistake #5: Not withdrawing money from the right accounts

Having enough money to be able to retire is one thing, but understanding how to withdraw the money in the most efficient manner is another. This can get even more challenging for those who are retiring before age 60. 

Maybe you have money in a Roth IRA in addition to a few 401Ks from different jobs. Perhaps you have a health savings account (HSA), a taxable account, or even a 457b or 401a account. Consult a financial planner or tax professional to help you navigate withdrawals from these accounts in the most tax-efficient manner. 

Some accounts, such as a pre-tax 401K or 457b, require you to pay taxes on any money you withdraw. Other accounts, such as an HSA, are completely tax free when used on healthcare. Withdrawals from a Roth IRA are tax free to you, and the best kind of money for heirs to inherit. 

The age you retire, the amount of money you need each year to live on, and the total amount you have in each type of account can drastically change how and when you should withdraw money in retirement. 

Not doing things optimally can cause you to pay more taxes while you are alive and leave your heirs with huge tax burdens when you pass away.