8 Foolish Things People Do With Their Retirement Accounts After Retiring

05/05/2024

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Reaching retirement is a major milestone, one you should be proud of. But just because you’ve reached the end of your working years doesn’t mean you should start spending your hard-earned retirement savings without a plan.

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After all, it’s taken you years — likely decades — to get to where you are right now. The last thing you need is to empty out your retirement accounts or find yourself without enough funds to sustain you throughout the rest of your life.

Here are some of the most foolish things people do with their retirement accounts after retiring, and what you should do instead.

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Withdraw Too Much in a Year

Withdrawing too much money from retirement accounts is problematic for a couple of reasons. For one, it can significantly affect your available funds for future years, and even leave your future self with a financial deficit.

But it can also lead to tax repercussions.

“Retirees may inadvertently push themselves into a higher tax bracket by withdrawing too much from their retirement accounts in a single year,” said Javarah “Jay” Joseph, CRPC, financial advisor with Jay’s Money Secrets.

The more you withdraw from your retirement accounts, the higher your income will be for that year. If this puts you into a higher income tax bracket, you’ll then get hit with a higher tax burden.

“To avoid this, pre-plan withdrawals with a tax advisor to understand the tax implications,” said Joseph.

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Claiming Social Security Too Early

“Having a strategy around claiming Social Security is critically important. Too often, I see retirees reflexively claim Social Security without taking into consideration the effects of delaying. It’s important that people make a rational choice when it comes to claiming [benefits], and not one based upon fear or anecdotal evidence,” said JP Geisbauer, CPA, CFP, founder of Centerpoint Financial Management.

You can start collecting Social Security or certain other retirement benefits early — sometimes as soon as you turn 59 1/2. But early withdrawals can lower your overall amount of available retirement income and cause issues later on.

Forgetting About RMDs

RMDs, or required minimum distributions, are essentially the minimum amount you have to withdraw from your retirement accounts in a given year. With certain accounts, like traditional IRAs, you have to start taking withdrawals at around the age of 72 or 73, depending on the year you were born. You can generally take more than the minimum, but you can’t take less.

“Missing RMDs can result in penalties,” said Joseph. “Set yearly reminders and meet regularly with your financial advisor to stay on track with required distributions.”

Being Overly Generous With Family or Friends

Being generous isn’t a bad thing, unless you don’t have the means to support yourself as a result.

“If you’re retired and have, say, $600K socked away, you might think it a no-brainer to help out an adult child with college expenses. But guess what? They can take out a student loan, you can’t. Also, that money of yours has to last you a lifetime, and if you’re in good health, that could mean 30 years or more,” said David Bakke, financial expert at DollarSanity.

Be generous, but be careful, too. Your loved ones might have other options you don’t right now — such as those loans or lines of credit. Don’t use your retirement accounts in a way that puts your own financial well-being in jeopardy.

Not Adjusting Your Investment Strategy With Age

“Some retirees either take on too much risk or adopt overly conservative investment strategies within their retirement accounts,” said Joseph. “It’s essential to find a balanced approach with downside protection and growth potential.”

Your investment strategy should change based on factors like your age, goals and income. If you’re younger, you might be better off with a more aggressive strategy. If you’re nearing retirement age, you might want to become a little more conservative.

“Just because someone retires does not mean that they need all of their retirement accounts in safe investments,” said Jamie Upson, owner and senior financial advisor at Stonehearth Capital Management. “There is nothing short about retirement, and some of the assets should be invested to address inflation and longevity risk.”

You can work with a financial advisor or certified financial planner to ensure your investment strategy and overall financial plan make sense with where you’re at in life and where you want to be. You can also do this yourself, but be sure to cover all your bases, so you don’t miss anything important when planning out your investments and retirement plan.

Losing That Money to Scams or Fraud

This might be less of an active decision, but many retirees will lose their money to scammers or become the victim of fraud. These things can rapidly deplete their retirement accounts and leave them in serious financial trouble.

“Retirees are targeted big time by scammers,” said Bakke. “Never sign off on anything too good to be true, never divulge your personal financial information to anyone, and if you’re in doubt about anything, consult a trusted friend or family member so you don’t fall victim to financial fraud.”

Using Retirement Funds for Risky Ventures

“Retirees sometimes use retirement funds to invest in unfamiliar or speculative ventures,” said Joseph.

This can be problematic, because these ventures are often risky and come with minimal to no returns. If someone isn’t careful, they could lose a lot of money by investing in these types of things — and even set themselves back when it comes to retirement.

Not Having a Plan at All

Having retirement accounts is great, but if you don’t have a realistic plan for how you’re going to use that money or your newfound freedom, you could be in for some trouble down the road.

“So you’ve taken the month-long vacation and finally cleaned out the garage. Now what? All too often, retirees don’t have a strategy for what they are going to do when they retire. This can lead to boredom and even depression,” said Geisbauer.

“Prior to retirement, make sure you have a social circle and support system of friends. Have some hobbies and try to line up some volunteer opportunities with causes or organizations you are passionate about. Try to stay active, both physically and mentally,” he continued. “A lot of retirees don’t plan for this aspect of retirement. If you are going to retire, make sure you know how you are going to fill your days and who you are going to be spending the time with.”

For anything extra that costs money — like vacations, hobbies or social events — make sure they also fit into your financial means. Ideally, you’ll have already factored these things into your retirement planning during your working years. If you didn’t, you might need to make some adjustments now or cut back on spending elsewhere to accommodate for them.