7 Things Almost Every Retiree Gets Wrong in the First Year

When you're finally ready to retire and start withdrawing from your 401(k) retirement plan, it's easy to overspend at first. After all, you go from working all day, every day to having each day feel like the weekend. So, it's common for many retirees to spend more than they realize in the first year of retirement. 

Additionally, many people go into retirement without a plan for how they'll handle withdrawals or taxes.

So, in order to help younger generations avoid expensive financial mistakes during their first year of retirement, here are seven of the most common ones that many people get wrong in their first year.

Overspending in the "honeymoon phase"

As mentioned, many people overspend right when they retire. It's essentially like being in the honeymoon phase of retirement. 

Spending on travel and shopping is highest when people are newly retired, then gradually dips as they age. 

While retirement is absolutely a time to enjoy life, spending early in retirement can negatively affect your overall finances. That's because retirees in their first year still have a long time horizon ahead of them, and spending too much at the beginning can hamper their ability to preserve their cash for the future.

Pulling from investments during a market downturn

The market will go through cycles during retirement, just as it did during people's working years. However, one mistake people make is pulling from investments during a down market. Doing this essentially locks in losses that the portfolio can't recover from. 

Many financial experts recommend that retirees keep a solid emergency fund covering at least one to two years of expenses, so they can draw on it during down markets to live on without affecting their overall retirement strategy.

Not having a solid withdrawal strategy

Retirees with multiple sources of retirement income, such as 401(k)s, IRAs, HSAs, and Social Security, need a solid withdrawal strategy. Without it, retirees can make the mistake of pulling from accounts in the wrong order. 

Additionally, having a proper withdrawal strategy can help people avoid tax surprises during their first year of retirement.

Missing Medicare enrollment windows

Some people don't realize that there is a penalty if you enroll late for Medicare coverage. It's called a late enrollment penalty, and it's added to your monthly premiums. 

Some penalties are lifetime penalties, not a one-time late fee. So, it's important to prioritize this enrollment when you're retired. 

It's easy to miss deadlines, especially if you have trips planned or experience health issues that prevent you from completing everyday tasks. However, this is one category where it's important not to miss the enrollment window.

Underestimating health care costs

According to Fidelity, retirees who are 65 years old will spend over $170,000 on health care during retirement. This number does not include long-term care, such as retirement homes or a memory care facility. So, many retirees will spend even more than this on their health care needs. 

Additionally, this cost has increased substantially over the last 25 years, so retirees need to plan for rising health care costs as well.

Claiming Social Security without a timing strategy

Many retirees rely on Social Security because it provides guaranteed income. However, many claim it without having a timing strategy. 

For example, retirees born in 1960 or later can receive their full benefits at age 67. However, those who can delay receiving Social Security checks can receive a higher amount. Retirees who wait until age 70 to receive Social Security benefits can receive 129.3% of the amount. 

Deciding how long to wait before claiming Social Security varies from person to person and typically depends on whether or not you have other income streams in retirement.

Underestimating taxes on retirement income

Many people believe that their taxes will be lower in retirement because they are no longer earning a salary and are instead on a fixed income. 

However, without proper planning, retirees may pay more in taxes due to an income combination of Required Minimum Distributions, Social Security income, and investment gains. 

Working with a financial planner and an accountant can help retirees avoid tax surprises in retirement.

Bottom line

Part of enjoying a stress-free retirement is having a plan for your finances. Many retirees make the mistakes mentioned above during their first year of retirement, but you don't have to. Taking some 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 many years to come. 

If you're not sure how well you've prepared for retirement, consult with a financial advisor who can give advice on how to optimize your withdrawal strategy and plan your taxes.