The Biggest Mistakes Retirees Make (And How to Avoid Them)

Q1: What is the single biggest mistake retirees make from a tax planning perspective?

Not having a tax plan. Not having good tax strategy going into retirement.

When a client is working, they're collecting a wage and having taxes withheld from their paycheck. They file their taxes at the end of the year and that's it. But when a client retires, they're meant to create their own retirement paycheck. A big portion of that is tax planning—where are you going to pull your funds from, in what order, and how much?

A lot of retirees are not ready to take on those decisions. By not having an appropriate tax strategy, it could cost some retirees hundreds of thousands of dollars over a 30-year retirement. For others, it might be tens of thousands of dollars. But either way, it's real money. If you saw that money laying on the ground, you'd pick it up.

Q2: What is the biggest investment mistake retirees make?

Being complacent with their investments. Everybody just expects to coast and things to work themselves out. But we are in year 17 of a bull market, and every dip has been aggressively bought. It's conditioning people to be complacent.

It's not always going to be like this. I don't know if that ends tomorrow or 10 years from now, but chances are that during our retirees' lives, they're going to go through a few more bear markets. You want to make sure you're prepared and aware of the risks your portfolio entails.

The S&P 500 is a fine investment and a very cheap way to access the market. But the more your fortunes are tied to the performance of the largest 500 US companies, the more you're exposed when that subset struggles. You can invest in a passive manner and things will eventually work themselves out, but you're probably going to be losing a lot of sleep at night watching your portfolio go down much faster and further than you're comfortable with.

Q3: Why does complacency become such a problem in retirement?

People are so ingrained with the concept of tax deferral from their working years. They hit retirement and might not tap into those retirement accounts first because they want to continue to defer taxes. So they take from CDs or taxable brokerage accounts to cover living expenses. Then required minimum distributions start, and Houston, we have a problem. You may be in a far higher tax bracket when those RMDs kick in, and you didn't take advantage of those lower-income years early in retirement.

From an investment standpoint, being a buy-and-hold investor is easy during a bull market. But try being a passive index fund investor when the market's down 50% and your blended portfolio is down 35%, like we saw in 2008. It's a lot harder than it sounds. In 2008, we thought the global financial system was going to collapse. It wasn't just "my stocks are down, they'll come back." It was "the world is ending, I need to make sure my money is safe." That's what forces people to make poor emotional decisions.

Q4: What is the "window of opportunity" that new retirees often miss?

Those first few years of retirement can be incredibly low income. You might be deferring Social Security to full retirement age at 67, and sourcing your income from CDs or taxable brokerage accounts. Some retirees have told me they paid no federal tax at all. That's a missed opportunity.

You could be taking advantage of those very low tax brackets—the 10%, 12%, even the 22% for some—and doing things like Roth conversions to help re-diversify your tax portfolio and lower future RMDs. Or you might have low enough income to qualify for the 0% long-term capital gains rate, taking income out of appreciated investments and not owing a dime in federal taxes.

For many retirees, it's only a few years—maybe five—that you might be able to leverage these strategies. Once it's gone and RMDs kick in, you don't have as much flexibility.

Q5: How does Social Security factor into tax planning?

Once you start Social Security, you typically can't go back. You then have forced income from the federal government that you have to plan around. If you didn't have that income, your income would be lower, affording you the opportunity to do some of the strategies we talked about.

There's also what they call the Social Security tax torpedo. When you start claiming Social Security, by including additional income, it causes more of your Social Security benefits to be taxed. That can really spike someone's overall effective tax rate. There's just so much in play both before you start claiming and after.

Q6: What is sequence of return risk and why should retirees care?

Sequence of return risk is simple math. If you retire right before a bear market, your retirement picture looks a lot different than somebody who retires in the middle of a bull market. The money you withdraw is being forced to be sold at lower prices, and that money can never recover because you're spending it.

Talk to anybody that retired in 2007, right before the housing bubble burst. A lot of them probably went to cash in fear that their money was going to run out. You need to have a plan in place before things start to go south. If you're reacting to whatever is going on in the markets and the news, chances are you're going to make a mistake. Selling is the easy part—getting back in is the hard part.

There have been periods where it takes a long, long time to come back. We saw a glimpse of this in 2022 when stocks and bonds went down together. The 1970s was an entire decade of this. Stocks and bonds, which are supposed to be the stability portion of your portfolio, got eviscerated. Try being a buy-and-hold investor through that scenario.

Q7: What's the bottom line on the biggest mistakes retirees make?

The undertone to all of this is complacency. Thinking that everything's going to be okay. The investment strategy has worked, so it's going to continue to work. I'm going to pay less in taxes throughout retirement. I have enough, but I didn't plan for it.

It boils down to not taking a deeper dive into your overall comprehensive situation. It's the ostrich strategy—bury your head in the sand and hope when you pull it up, everything will be fine again. Unless you are aware of the risks you're undertaking, the chances that you make a mistake in the heat of the moment probably increase unless you had a plan in place beforehand.