5 Common Financial Mistakes to Avoid in Retirement

After years of planning and saving diligently, reaching retirement is a milestone that’s worth celebrating. But you need to be prepared to shift out of saving mode and begin drawing on your nest egg for income. This can be a big transition, both financially and emotionally, but the right strategy can help you get the most out of your savings—and reduce the risk that you’ll outlive your savings.

That’s why working with a Northwestern Mutual financial advisor to regularly review your situation can help you make educated financial decisions and avoid some of the common financial mistakes retirees make.

5 common financial mistakes to avoid when you retire

Mistake No. 1: Maintaining the same level of risk

During your working years, the goal is to save and invest in a way that grows your assets. That usually means assuming more risk in your portfolio. You’ll want to reevaluate your strategy as you transition into retirement. If your asset allocation is heavy on stocks, you could suffer big losses during market downturns. But pulling out of the stock market entirely can make it difficult to keep pace with inflation. It’s possible to stay invested without exposing yourself to too much risk.

Holding 60 percent stocks and 40 percent bonds is the general rule in retirement, but things are evolving. Andrew Weber, CFP® professional and senior director of planning philosophy, research and guidance at Northwestern Mutual, says there are advantages to leveraging income annuities and whole life insurance.

“You could use this type of guaranteed income, along with Social Security, to cover your basic retirement expenses,” he says. “Then it won’t really matter what your investment portfolio does because you're not relying on it to pay your bills. Instead, your portfolio can be there to fund vacations or leave a legacy for your children and grandchildren.”

Reimagining the 60/40 portfolio could pay off in retirement. An experienced financial advisor can help you work through the details while keeping your risk tolerance in mind.

Mistake No. 2: Not maximizing your income

Just as you diversify your investments, it’s wise to have a healthy mix of retirement income. It can put you in a better position to withstand market losses and minimize your taxes. That’s important because some retirement accounts are taxed differently than others (more on this shortly).

“You want a strategy that will give you plenty of options when it comes to retirement income,” Weber says. “There are a lot of moving parts to consider, and they all work together.”

Ideally, you’ll have a variety of retirement income sources to lean on. That can include:

• Retirement accounts like 401(k)s and IRAs
• brokerage accounts
• Social Security
• Pensions
• Annuities
• Cash value in a whole life insurance policy*
• Cash savings

Timing is another thing to think about. The last thing you want to do is pull money from your investments when the market is experiencing a downturn.

Mistake No. 3: Spending too much or too little

Some folks prefer to spend more early in their retirement, while others take a more conservative approach so that they’ll have more later on. Weber says the best option is usually somewhere in the middle.

“A majority of people leave way too much behind and don't maximize the amount of enjoyment they could get out of their retirement because they're concerned about running out of money,” he says. “But spending without a plan could impact your financial future.”

It’s about choosing a spending range that feels right for you, which has everything to do with your retirement vision. Do you plan on traveling frequently or having a more modest retirement? Your answer will shape your spending plan. Estimate your essential expenses, then add in the cost of your retirement goals. From there, you can make a plan that’s built around your values.

Mistake No. 4: Overlooking your tax liability

Withdrawals from tax-deferred accounts, like 401(k)s and traditional IRAs, count as taxable income. That could trigger a significant tax bill in retirement. In some cases, it might even push you into a higher tax bracket.

“A lot of people haven't adequately prepared for enough tax diversification with their retirement plan, so they have limited choices,” Weber says. “If all your money is tied up in a 401(k), you don’t really have much control over your tax liability.”

Being strategic about how you draw on your investments can help reduce your tax bill in retirement. Just keep in mind that you must begin taking required minimum distributions (RMDs) from tax-deferred accounts once you turn 73. If you don’t need your RMD, you may be able to donate it to an eligible organization. This is called a qualified charitable distribution (QCD), which is excluded from your taxable income.

Mistake No. 5: Not accounting for health care costs

Health care costs in retirement can add up to a hefty expense. Even with Medicare, you’ll be on the hook for certain premiums, copays and deductibles. But your costs could be even higher if you develop an illness that requires continual care.

“The biggest unknown is long-term care, which can either be astronomical or nothing at all,” Weber says. “Expenses related to aging are a big variable in the equation. You want to be prepared for the worst but still able to live your best life today.”

Without long-term care coverage, medical expenses could take a major bite out of your savings. That might impact your quality of life in retirement and affect your legacy plan. Think of it as a safety net you hope you’ll never need.

The truth is that no two retirement plans are alike because every retiree has their own financial goals and risk tolerance. Your advisor can help you come up with a strategy that’s tailored to you. No one can predict the future, but a strong financial plan can better prepare you for whatever lies ahead.

No investment strategy can guarantee a profit or protect against loss.

Distributions from an IRA or 401k may be subject to ordinary income tax and may be subject to a 10 percent IRS early withdrawal penalty if taken before age 59 ½.

This publication is not intended as legal or tax advice. Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

*The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.

CFP disclosure:  

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.