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When you are finally ready to retire and start withdrawing from your 401(k), it is surprisingly easy to overspend. You go from working every day to having each day feel like the weekend, so many new retirees spend more than they realize in that first year.
Many people also walk into retirement without a clear plan for handling withdrawals or taxes. To help you avoid expensive missteps, here are seven of the most common mistakes people make during their first year of retirement.
1. Overspending in the honeymoon phase
The early days of retirement can feel like a long-awaited vacation. Spending on travel and shopping tends to be highest when people are newly retired, then gradually dips as they age.
Retirement is absolutely a time to enjoy life, but spending heavily at the start can hurt your long-term finances. New retirees still have a long time horizon ahead of them, and overspending early can undercut their ability to preserve cash for the decades to come.
2. Pulling from investments during a market downturn
The market moves in cycles during retirement, just as it did during your working years. One costly mistake is pulling money from investments during a down market, which locks in losses your portfolio may never recover.
Many financial experts recommend keeping a solid emergency fund that covers at least one to two years of expenses. That cushion lets you draw on cash during down markets without disrupting your overall retirement strategy.
3. Not having a solid withdrawal strategy
Retirees with multiple income sources, such as 401(k)s, IRAs, HSAs, and Social Security, need a clear withdrawal strategy. Without one, it is easy to pull from accounts in the wrong order and pay more than necessary.
A thoughtful withdrawal plan also helps you avoid tax surprises during your first year, when many retirees are still learning how their income streams interact.
4. Missing Medicare enrollment windows
Some people do not realize there is a penalty for enrolling in Medicare late. Known as the late enrollment penalty, it is added to your monthly premiums, and some versions are lifetime penalties rather than a one-time fee.
It is easy to miss a deadline, especially if you have trips planned or face health issues that get in the way of everyday tasks. This is one area where missing the enrollment window can be expensive, so make it a priority.
5. Underestimating health care costs
Health care is one of the largest expenses in retirement, and many people underestimate it. According to Fidelity, a 65-year-old retiree will spend more than $170,000 on health care during retirement.
That figure does not include long-term care, such as a retirement home or memory care facility, so many retirees will spend even more. Health care costs have risen substantially over the past 25 years, so it is wise to plan for continued increases.
6. Claiming Social Security without a timing strategy
Many retirees rely on Social Security because it provides guaranteed income, but a large number claim it without a timing strategy. Retirees born in 1960 or later can receive their full benefits at age 67.
Those who can afford to wait, however, receive a larger check. Retirees who delay until age 70 can receive 129.3% of their full benefit amount. How long to wait varies from person to person and usually depends on whether you have other income streams in retirement.
7. Underestimating taxes on retirement income
Many people assume their taxes will drop in retirement because they are no longer earning a salary. Without careful planning, though, retirees can actually pay more.
The combination of required minimum distributions, Social Security income, and investment gains can push your taxable income higher than expected. Working with a financial planner and an accountant can help you avoid an unwelcome tax surprise.
Bottom line
A big part of enjoying a stress-free retirement is having a plan for your money. Many retirees make the mistakes above in their first year, but you do not have to.
Taking time to do your research before claiming Social Security, enrolling in Medicare, or withdrawing from your 401(k) can help you preserve your nest egg for years to come. If you are unsure how well you have prepared, consult a financial advisor who can help you optimize your withdrawal strategy and plan for taxes, and take time to avoid money mistakes that could cost you in the long run.
Editor's Note: Portions of this story were drafted with assistance from generative AI tools. All final creative decisions, edits, and fact checking were done by human writers and editors.
