People spend years putting money away with the goal of having a comfortable nest egg once they retire. What’s talked about less is how easy it is to waste money in that first year of retirement, especially as people adjust to managing their savings instead of earning a paycheck.
“In my experience working with clients, the first year of retirement feels like stepping into a whole new season of life,” Trevor Houston, CEO at ClearPath Wealth Strategies, LLC, wrote in an email. “It is a big shift, and they have to learn how to manage that extra time along with their money. A lot of folks spend more than they realize because every day starts to feel like the weekend.”
Here are three ways retirees accidentally waste thousands in their first year out of work.
Taking Withdrawals at the Wrong Time
“One of the biggest mistakes I see comes from taking withdrawals at the wrong time,” Houston claimed. “When people pull money from their investments during a market decline, those losses become permanent.”
Many new retirees fall into this trap because they assume their portfolio will behave the same way it did while they were still working. Houston explained that during the first year out of the workforce, people finally have the time and freedom to spend more freely. But that shift also means their investments may be doing the opposite of what they expect.
When markets drop and retirees withdraw money at the same time, those losses become locked in, and the portfolio doesn’t get a chance to recover.
“And here is the part most people miss,” Houston added. “They think their portfolio is protected because it is balanced. They believe the bonds will keep everything steady.”
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To avoid this, Houston recommends having a portion of your income guaranteed before retiring. Social Security, pensions and income annuities can help cover core expenses and give retirees room to let the rest of their investments recover after a downturn.
With these basic needs covered, retirees can avoid withdrawing during a market dip and protect their long-term savings.
“A lot of people struggle with this transition because they are used to a steady paycheck. When you build guaranteed income first, you get breathing room,” Houston wrote. “That breathing room brings clarity. And that clarity puts you back in control.”
Overspending
Another problem is overspending.
“One of the biggest mistakes I see is that retirees often treat their first year of retirement as a ‘victory lap’ consisting of celebratory activities, like more frequent travel, remodeling, buying their dream car or helping out their adult children,” explained Steve Sexton, retirement planning expert at Sexton Advisory Group.
According to the 2024 Spending in Retirement Survey from the Employee Benefit Research Institute (EBRI), 31% of retirees said their spending is much higher or a little higher than they can afford.
“While it is natural to want to celebrate after decades of working, many retirees make these large discretionary purchases before they have a clear picture of what their sustainable withdrawal rate looks like,” Sexton added. “This can create a domino effect where they deplete their savings faster than planned.”
Forgetting To Adjust Tax Strategy
Another common issue is forgetting to adjust their tax strategy, according to Sexton. While many retirees assume their tax bill will automatically come down, that isn’t always true, especially if you’re drawing from multiple income sources.
“Without careful planning, RMDs or early withdrawals can easily bump you into a higher bracket,” Sexton pointed out. “This is why I encourage soon-to-be retirees to meet with their CPA [and/or] advisor to run these tax scenarios ahead of time.”
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This article originally appeared on GOBankingRates.com: 3 Ways Retirees Accidentally Waste Thousands in Their First Year Out of Work
