2 expensive mistakes most retirees make — and how to avoid them
Retirement can be financially comfortable, but two common choices cost retirees tens or even hundreds of thousands of dollars over time. The good news: both are avoidable with early, simple planning.
Mistake 1: Claiming Social Security too early
Why it’s expensive
– You lock in a permanent pay cut. If your Full Retirement Age (FRA) is 67, claiming at 62 reduces your benefit to about 70% of your FRA amount. Waiting past FRA earns delayed retirement credits of 8% per year until age 70. Result: claiming at 70 pays about 124% of your FRA amount. Compared with 62, that’s roughly a 77% higher monthly benefit for life.
– Higher survivor benefit. The larger of the two spouses’ benefits typically becomes the survivor benefit. Delaying the higher earner’s claim increases protection for the surviving spouse.
– Built-in inflation hedge. Social Security has annual cost-of-living adjustments (COLAs). Locking in a higher base compounds those raises.
– Sequence-of-returns protection. Bigger guaranteed income means you can withdraw less from investments in bad markets early in retirement.
When waiting makes sense
– You expect average or better longevity.
– The higher earner in a couple can delay, boosting the future survivor benefit.
– You can “bridge” income for a few years from savings or part-time work.
– You value inflation-protected, risk-free income.
When claiming earlier can be right
– Poor health or short life expectancy.
– No other resources and high-interest debt.
– You need benefits to qualify a non-working spouse for spousal benefits (at or after the spouse reaches 62; note modern rules limit some older strategies).
– You’ll keep working and your earnings are modest; but beware the earnings test before FRA, which can withhold benefits temporarily.
How to avoid the mistake
– Run the numbers. Use ssa.gov’s calculators or a reputable planning tool. Look at break-even ages; for many, delaying beyond 62 pays off by the late 70s to early 80s.
– Coordinate as a couple. Commonly, the higher earner delays (ideally to 70) while the lower earner claims earlier at or after FRA, depending on cash flow.
– Build a “bridge” plan. Cover the delay years with cash, maturing CDs/treasuries, or modest IRA withdrawals. Think of it as buying inflation-protected income by waiting.
– Mind the earnings test. If you claim before FRA and keep working, benefits can be withheld based on earnings; they’re adjusted later, but plan your cash flow.
– Enroll in Medicare on time. Even if you delay Social Security, sign up for Medicare at 65 unless you’re covered by eligible employer insurance to avoid penalties.
Mistake 2: Ignoring taxes and Medicare when planning withdrawals
Why it’s expensive
– Higher lifetime taxes. Without a plan, Required Minimum Distributions (RMDs) starting at age 73 (later for younger cohorts) can push you into higher brackets.
– Social Security taxes. Up to 85% of your benefit can be taxed depending on other income; poor sequencing can make this worse.
– Medicare IRMAA surcharges. Two-year look-back rules can add thousands to Parts B and D premiums if your modified adjusted gross income (MAGI) crosses tier thresholds.
– Capital gains and the 3.8% Net Investment Income Tax can sneak up if you sell appreciated assets without considering bracket stacking.
The fix: a multiyear, tax-aware withdrawal strategy
Design the plan 5–10 years before retirement and update annually.
1) Map the landscape
– List all accounts: taxable, traditional IRA/401(k), Roth, HSA.
– Estimate annual spending (after-tax) and guaranteed income (pensions, Social Security by age).
– Note key ages: 59½ (no IRA early-withdrawal penalty), 65 (Medicare), 70 (max Social Security), 70½ (QCDs), 73+ (RMDs), and upcoming tax law changes.
2) Use a flexible withdrawal order
– Often efficient: taxable first (harvest capital gains in the 0% or low brackets), then traditional accounts, save Roth for later. But optimize each year—there is no one-size-fits-all order.
– Fill brackets deliberately. In years with low income (commonly between retirement and Social Security/RMDs), consider:
– Partial Roth conversions up to the top of a target bracket (for many, the 12% or 22% bracket before scheduled rate increases in 2026).
– Realizing long-term capital gains while staying in the 0% or a low capital-gains bracket.
– Manage IRMAA proactively. Estimate MAGI two years ahead and keep it under IRMAA thresholds when possible. If you had a qualifying life-changing event (e.g., retirement), you can appeal a surcharge.
– Reduce future RMDs:
– Roth conversions in your “gap years” (often ages 60–70) shrink tax-deferred balances.
– Consider a QLAC (Qualified Longevity Annuity Contract) inside an IRA to defer RMDs on premiums used, if lifetime income later is attractive to you.
– Be charitable tax-smart:
– After age 70½, use Qualified Charitable Distributions (QCDs) directly from IRAs to charity. QCDs can satisfy RMDs and keep MAGI lower than taking the RMD and donating cash.
– Bunch several years of donations into a donor-advised fund in a high-income year for a bigger itemized deduction.
– Asset location matters. Generally hold tax-inefficient assets (like taxable bonds) in tax-deferred accounts, and high-growth or tax-efficient assets in Roth and taxable accounts.
– Use withholding strategically. You can make a single December IRA distribution with sufficient federal/state withholding to cover your entire year’s tax and avoid underpayment penalties.
A quick example of the value
– Couple, both 63, retire with $1,000,000 in IRAs and $300,000 in taxable savings. If they take Social Security at 63 and live off the rest, their IRAs may keep growing until RMDs at 73 push them into higher brackets and trigger IRMAA.
– Instead, they delay Social Security to 70 and do annual Roth conversions in the 12–22% brackets during ages 63–69, funding living expenses from taxable savings.
– Result: smaller future RMDs, lower taxation of Social Security, fewer IRMAA surcharges, and more tax-free Roth assets later. Over a 25–30 year retirement, this type of plan often saves six figures in lifetime taxes and premiums.
A simple checklist to stay on track
– 3–10 years before retirement: Model Social Security timing and start a multiyear tax plan.
– Each fall: Project next year’s income, brackets, and IRMAA; plan conversions and capital gains.
– At 62–70: Revisit the claim date annually; adjust for health, markets, and cash needs.
– At 65: Enroll in Medicare (or document employer coverage); watch two-year MAGI for IRMAA.
– At 70½+: Use QCDs if you give to charity.
– At 73+: Automate RMDs; continue tax-bracket and IRMAA management.
Bottom line
– Expensive mistake #1 is claiming Social Security too early without running the numbers and coordinating as a couple.
– Expensive mistake #2 is treating withdrawals as an afterthought, rather than a multiyear, tax- and Medicare-aware plan.
Start planning a few years before you retire, revisit annually, and consider working with a fee-only planner and a tax pro to tailor these moves to your situation. The payoff—higher guaranteed income, lower lifetime taxes, and more flexibility later—is worth it.
