Small planning errors can create massive financial leaks over a 30-year retirement.
You've spent decades building your retirement nest egg through disciplined saving and smart investing. Yet, in just a few years of retirement, common planning mistakes can erode millions from what you've accumulated. The complexity of retirement planning means that even financially savvy individuals often overlook critical details that carry severe long-term consequences .
Based on analysis from top financial institutions and advisors, here are the seven most expensive retirement mistakes—and more importantly, how to avoid them to protect the retirement you've earned.
Mistake #1: The "Forgetful" $5,000 Penalty: Missing RMDs
This might be the single most expensive oversight in retirement planning. Required Minimum Distributions (RMDs) are not a suggestion—they're a legal requirement from tax-deferred accounts like traditional IRAs and 401(k)s once you reach age 73 (or 75 if born in 1960 or later) .
The Cost of Forgetting
While the SECURE 2.0 Act reduced the penalty, it remains severe. If you fail to take your full RMD by the deadline, the IRS imposes an excise tax of 25% on the amount you failed to withdraw .
Plus: You still must withdraw the $40,000 and pay regular income tax on it.
The Solution: Set up automatic RMD services through your brokerage. Most major firms offer this free service where they calculate and distribute the correct amount each year. Alternatively, if you don't need the cash flow, consider Qualified Charitable Distributions (QCDs) after age 70½ to satisfy RMDs tax-free .
Mistake #2: The $300,000 Social Security Timing Error
Claiming Social Security benefits too early is a decision that compounds against you for the rest of your life. While you can start at 62, doing so locks in a permanently reduced benefit—up to 30% less than your full retirement age amount .
The Lifetime Cost of Early vs. Delayed Social Security
Permanent reduction in monthly benefits. For a $2,437 monthly benefit at Full Retirement Age (FRA), claiming at 62 gives only $1,706 .
Maximum benefit increase. That same benefit grows to $3,022 at age 70—a difference of $1,316 more per month for life .
The Math: For someone with a $2,437 monthly benefit at full retirement age, waiting until 70 increases the monthly check to $3,022. Over a 20-year retirement from age 70 to 90, that's over $315,000 more in total benefits . The decision is particularly crucial for married couples, as the higher benefit continues for the surviving spouse.
Mistake #3: Underestimating the Healthcare & Long-Term Care "Black Hole"
This is the retirement cost that surprises nearly everyone. Medicare provides valuable coverage, but it was never designed to cover all health expenses in retirement .
What Medicare Does (and Doesn't) Cover
Not Covered by Medicare
Most dental, vision, and hearing care
Long-term nursing home care
Deductibles and copayments for covered services
Partially Covered
Hospital stays (Part A) with deductibles
Doctor visits (Part B) with premiums & copays
Prescription drugs (Part D) with coverage gaps
The Stark Reality
An average 65-year-old couple needs approximately $315,000 saved just for healthcare expenses in retirement . Furthermore, someone turning 65 today has a 70% chance of needing long-term care, with 20% needing it for more than 5 years .
The Solution: Plan proactively. Consider Health Savings Accounts (HSAs) before Medicare eligibility, long-term care insurance (though premiums can be costly), or dedicated savings for these expenses. A financial advisor can help you assess whether to self-insure or purchase coverage .
Mistake #4: Poor Tax Diversification & RMD Surprises
Having all your retirement savings in tax-deferred accounts (like traditional 401(k)s and IRAs) creates a significant tax time bomb. When Required Minimum Distributions begin, they can push you into higher tax brackets, increase Medicare premiums, and even cause your Social Security benefits to become taxable .
The problem compounds because RMDs are based on your account balance and life expectancy. A large tax-deferred balance means large mandatory withdrawals that you may not need, creating unnecessary taxable income .
The Tax Diversification Strategy
Spread your savings across three types of accounts: Tax-deferred (traditional IRAs/401(k)s), Tax-free (Roth IRAs), and Taxable (brokerage accounts). This gives you flexibility to manage your taxable income in retirement .
Roth Conversions in Low-Income Years
Consider converting portions of traditional IRAs to Roth IRAs during years when your income is lower (perhaps between retirement and starting Social Security). You pay taxes now at a lower rate to enjoy tax-free withdrawals later .
Strategic Withdrawal Order
Generally, withdraw from taxable accounts first, then tax-deferred, then tax-free. This allows tax-deferred accounts more time to grow and helps manage your annual taxable income .
Mistake #5: Selling Investments in a Downturn (Sequence of Returns Risk)
When the market declines early in retirement and you're forced to sell investments to cover living expenses, you lock in losses and reduce your portfolio's ability to recover. This "sequence of returns risk" can devastate a retirement plan .
A Stark Example: Schwab research shows two hypothetical investors with $1 million portfolios taking $50,000 annual withdrawals (adjusted for inflation). Investor 1 suffered a -15% return in the first two years of retirement; Investor 2 had the same downturn but in years 9 and 10. Investor 1's account was depleted after 17 years, while Investor 2 still had over $100,000 after 20 years .
The Solution: Maintain 1-3 years of living expenses in cash or cash equivalents. This creates a buffer so you don't need to sell investments during market downturns. Also, consider adjusting your asset allocation to be slightly more conservative as you enter retirement .
Mistake #6: Borrowing From or Taking Early Withdrawals From Retirement Accounts
Tapping retirement savings before retirement seems tempting in a financial pinch, but the long-term cost is astronomical due to lost compound growth .
The Triple Whammy of a 401(k) Loan
According to Fidelity's Meghan Murphy, borrowing from your 401(k) creates multiple problems :
1. Lost Contributions: You often reduce or stop new contributions while repaying the loan.
2. Lost Employer Match: You sacrifice "free money" from your employer's matching contributions.
3. Job Change Risk: If you leave your job, the loan typically must be repaid within 60-90 days or it becomes a taxable distribution with potential penalties .
Better Alternatives: Before touching retirement funds, explore other options: emergency savings, home equity lines of credit (HELOCs) for major expenses, or student loans for education costs . The 10% early withdrawal penalty plus regular income taxes makes retirement funds an expensive last-resort option.
Mistake #7: Failing to Account for Inflation Over a 30-Year Retirement
Inflation is the silent thief of retirement purchasing power. At just 3% annual inflation, what costs $100,000 today will cost about $180,611 in 20 years . Many retirees make the mistake of keeping too much in "safe" investments that don't outpace inflation, causing their real purchasing power to decline year after year.
The Erosion of $100,000 by Inflation
Required to maintain same purchasing power
Required to maintain same purchasing power
Required to maintain same purchasing power
The Solution: Your retirement portfolio needs growth-oriented investments, even in retirement. A diversified portfolio that includes stocks (particularly those with dividend growth potential) can help combat inflation. Work with a financial advisor to determine an appropriate asset allocation that balances growth with your risk tolerance .
The Bottom Line: Proactive Planning Beats Costly Corrections
The financial system's complexity means that retirement planning mistakes are easy to make but expensive to fix . The common thread among these seven multimillion-dollar errors is that they're all preventable with awareness and proactive planning.
Remember these key principles: Start planning conversations early (ideally 5+ years before retirement), work with qualified professionals (financial advisors and tax experts), and regularly review your plan as tax laws and your personal circumstances change.
Your retirement security is too important to leave to chance. By understanding and avoiding these costly mistakes, you can protect the nest egg you've worked a lifetime to build and ensure it supports the retirement you've envisioned.