By Andrew J. Tapparo, MSF, RICP®
As a financial advisor, people often ask me about some of the biggest financial mistakes I see retirees make. There’s a hint of anxiety in that question, of course. After all, the U.S. government reports that nearly 3 in 10 Americans (29%) have no defined retirement plan.
But a poor savings strategy isn’t the only mistake retirees can make. Here are the 3 biggest mistakes I see retirees make—and how you can avoid them.
1. Claiming Social Security Too Early
One of the biggest mistakes I see retirees make is claiming Social Security too early. While you can claim your Social Security benefit as early as age 62, there are several consequences for doing so.
If you want to get the most from your Social Security benefits, you’ll need to wait until age 70 to claim them; otherwise, you could see as much as a 30% reduction in your monthly benefits. If you choose to claim your social security benefit before reaching your full retirement age (FRA) and you are still working, you could see a reduction in benefits. In 2024, Social Security recipients will see a $1 reduction in their monthly payments for every $2 they earn above $22,320.
Lower Cost-of-Living Adjustments
Retiring too early can have an impact on your cost-of-living adjustments. In 2024, beneficiaries can expect an increase of 3.2%. If a person claims social security at age 70 and their monthly benefit is $2,000, they will receive an additional $64 each month after the increase. But if they claimed at age 62 and their reduced monthly benefit was just $1,500, they would only see an increase of $48.
Impact on Survivor Benefits
If you or your spouse should pass away, the chosen claiming strategy can have a direct impact on the surviving spouse’s survivor benefits. Retiring early reduces your spouse’s survivor’s benefits in the same way it lowers your monthly payments.
2. Following General Rules of Thumb
Another of the biggest financial mistakes I see retirees make is following generic “rules of thumb” instead of assessing their own unique situation. For example, many retirees believe they should draw money from their retirement accounts in a very specific order:
- Taxable accounts first
- Tax-deferred accounts (traditional IRAs, 401(k)s, etc.)
- Tax-free accounts (Roth IRAs)
The problem with this approach is it ignores the progressive nature of the U.S. tax code. If you follow this strategy, you’ll pay no income tax during your early years, but in later years, you could face much higher income taxes as you make withdrawals from your tax-deferred accounts. Additionally, higher taxable income while enrolled in Medicare could leave you paying IRMAA penalties in your later years.
The best way to avoid these consequences is by working with a financial advisor who can educate you on how to plan your retirement tax situation. I personally work alongside individuals to develop a plan to minimize tax liability throughout their retirement years.
3. Investing Too Conservatively
Among the financial mistakes I see retirees make is the tendency to invest too conservatively. For example, many retirees increase their exposure to bonds; but historically bonds have not kept up with inflation. Bonds may seem “safe,” but they’re not risk-free. In fact, you run the risk of not having enough money to cover your increasing cost of living in retirement.
Bonds may be useful for covering short-term needs, but the only way to truly build wealth is by investing in stocks. The U.S. stock market offers an average rate of return of roughly 10% (large U.S. company stocks). Some securities offer the potential for even larger gains, but it’s important to consult a financial advisor to help you make smart investment decisions and mitigate potential risk.
Avoiding the Biggest Financial Mistakes I See Retirees Make
Actually, one of the biggest financial mistakes I see retirees make is trying to plan for their retirement years on their own. The right financial advisor can guide you toward your ideal financial future. We at Tapparo Capital Management are here to help. As fee-only fiduciaries, our promise is pretty simple. We put you, your needs, and your best interest first, always—no matter your income level, net worth, age, or portfolio size. As a small, independent firm, we're proud to place an emphasis on the relationships we develop, rather than the size of any account.
We invite you to call 978-887-1121 or email email@example.com to schedule a “get acquainted call”—let’s see if we are a good fit for each other!
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.
Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.