12 Mistakes That Can Deplete Middle-Class American’s Retirement Savings


Retiring can be exciting, but it is also a learning curve for most retirees. Unfortunately, it’s also the time most people make costly financial mistakes that can impact their savings.  Our detailed guide lists some common mistakes that can deplete your retirement savings.

Avoiding these mistakes can help you achieve financial freedom and ensure you’re on track to your retirement goals. 

Here are 12 mistakes to avoid in your retirement. 

Failing to Diversify Your Investments

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Some retirees have a collection of similar investments. Unfortunately, this could be risky as you may fall all at once if your investments don’t pick up. Ensure that your investment portfolio has different asset classes. A diversified portfolio reduces overall risk, protects against inflation, and ensures long-term growth. 

Not Accounting for Health Costs

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Rising healthcare costs account for a significant portion of your retirement budget. Medical costs, even with Medicare, could put you at risk of depleting your retirement savings. Research shows that retirees will likely use nearly 70% of their lifetime Social Security benefits to cover their health costs.

Unfortunately, only half of the Americans interviewed understood how much they need to set aside for healthcare costs in retirement. Working with a financial advisor can help you estimate how much you need to cover healthcare costs and save for other retirement expenses.

You can also manage healthcare costs by getting a long-term care insurance policy and opting for a health reimbursement arrangement. 

Underestimating Retirement Expenses

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Many retirees need to pay more attention to the cost of retirement expenses like home maintenance, food costs, car bills, utilities, and more. Failing to account for these expenses can lead to financial stress and strain.

Proper budgeting and planning can reduce the risk of depleting our savings. Working with a financial planner can also help you learn how to manage your expenses and not go into debt. 

Poor Tax Planning

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Most retirees need to consider tax planning as they have fewer deductions and lower income than other taxpayers. Unfortunately, tax deductions can be a burden in retirement. For example, pension payments, 401(k) withdrawals, and social security benefits may be taxable depending on other income sources. 

Retirement tax planning can help you save money, reduce capital gain taxes, and help you have peace of mind. Working with a tax professional can make your work easier if you don’t understand retirement tax planning or are looking to invest in your retirement and have no idea how taxation will affect your returns. 

Carrying Debt Over in Your Retirement

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Carrying debt into retirement means you may need to withdraw from your retirement accounts earlier than required. Additionally, you’ll have to use your retirement savings to pay off debt, reducing the cash flow to spend on daily expenses, health care, travel, and more.

If you already have debt when you retire, avoid gaining more debt, reduce your spending, consider debt relief options, or speak to a financial expert to understand your options. 

Spending a Lot of Money Too Soon

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The retirement savings amount looks large, which can be tempting for some retirees. Avoid the temptation of splurging and living beyond your means once you retire. Note that this money accounts for your daily expenses, healthcare costs, utilities, and other unforeseen costs. Discipline will help you learn how to budget your money effectively and live within your means. 

Falling Into Frauds and Scams

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Most con artists and scammers target retirees as they know how susceptible they are when mentioning the word investment. Avoid signing up or investing in things you don’t understand. Research and consult a financial advisor if you’re unsure about specific investment opportunities.

Applying for Social Security Too  Soon

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Recent research discovered that U.S. workers would benefit from waiting until 65 to start reaping Social Security retirement benefits. Additionally, experts advise retirees to wait until they are 70 to qualify for higher retirement benefits. 

Claiming your social security when you are 62 means your benefits are reduced by 30%. Additionally, it makes you ineligible for Medicare coverage. Waiting to apply for social security when you are 70 guarantees higher monthly benefits, a smaller cost of living adjustment, and reduces your future required taxable minimum distributions.

Before you decide to apply for social security too soon, weigh the pros and cons and make an informed decision. 

Taking Loans From Your 401(K)

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It’s tempting to cash out on your 401(K) as the funds allow you to borrow up to 50% of the funds in the account. That ends up being borrowed money that you’ll need to pay upfront on top of other income taxes you have on the money. Taking loans from your 401(k) before age 59 can also lead to a 10% penalty for early withdrawal.

You also risk running short of retirement funds. Find other alternatives before borrowing from your 401(k), and always live within your means to avoid depleting your retirement savings. 

Failing to Plan Your Estate

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Estate planning isn’t limited to writing a will. It also outlines asset distribution and your wishes. Unfortunately, neglecting estate planning strains your family relations and could become costly as you must account for court costs and legal fees.  The state can also determine how the assets are distributed, further complicating things. 

Incorporating estate planning into your retirement can help reduce these problems and lead to financial stability. Consider working with a financial advisor to assess your income sources, assets, and debts. That will allow you to create an effective estate plan that reduces tax liabilities, protects your assets, and protects your beneficiaries.

Making Investment Decisions Based on Your Emotions

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Emotions can quickly cloud your investment decisions, especially in your retirement. Some retirees make the mistake of investing for fear of losing money, while others could be more confident, which could lead to risky investments. Avoid making emotional investment decisions.

Identify your investment goals, assess your risk tolerance, and focus on diversification to reduce the risk of loss. Working with a financial advisor can help you avoid bad choices and protect your retirement savings from short-term taxes and trading costs. 

Not Reviewing and Adjusting Your Retirement Plan

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A survey by Voya Financial reveals that 80% of those with retirement plans hardly make any changes or review them annually. Financial experts attribute this to a lack of knowledge, while some think it’s due to fear.  

Unfortunately, failing to review your retirement plan regularly can be detrimental, as specific life changes can alter your finances. For example, being a caregiver or a sudden life event like a divorce can alter your finances, and you need to account for these changes to manage your retirement funds better. 

Reviewing your retirement plan also ensures that you stay compliant with the latest legal requirements and that any expenses you incur are reasonable and fair. 

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Maybe, just maybe, they started out with modest, frugal lifestyles to get to their millionaire status. Here are some ways in which millionaires lead their lives to live up to their millionaire rankings.

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