The first year of retirement is when dreams meet reality. For many new retirees, it’s also when costly financial mistakes can set the stage for decades of money problems. Aaron Channing has seen these mistakes firsthand. As a partner and private wealth advisor at Fortivus Wealth Group, a Northwestern Mutual Private Client Group, he works with clients navigating the transition from earning to spending their nest eggs.
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The mistakes he sees aren’t just about poor planning. They’re about failing to adjust to a completely different financial reality. Here are the four biggest money mistakes Channing said new retirees make in their first year.
Not Adjusting Investment Strategy for the New Reality
Many new retirees make a dangerous assumption. They think they can keep the same aggressive investment approach that worked during their earning years.
“A common oversight among new retirees is neglecting to shift their investment approach to reflect their new financial reality,” Channing explained. “Continuing with a high-risk strategy in retirement can expose assets to unnecessary volatility, which may be harder to recover from without a steady income.”
The problem is timing. During working years, aggressive growth strategies make sense because you have decades to recover from market downturns. You also have a steady paycheck to keep adding money to your accounts.
Retirement changes everything. You no longer have decades to recover from losses. You also don’t have earned income to build accounts back up after market crashes.
“Transitioning to a more conservative investment strategy doesn’t mean abandoning growth entirely,” Channing shared. “Instead, it involves rebalancing the portfolio to prioritize capital preservation and reduced exposure to market fluctuations.”
The key is finding the right balance for your specific situation. Someone planning frequent travel or large discretionary spending needs a different allocation than someone focused on maintaining a modest lifestyle.
“This is why working with a financial advisor is so valuable,” Channing said. “Advisors serve as impartial experts who can tailor recommendations to align with a retiree’s specific circumstances, helping to ensure that their investment strategy supports both short-term needs and long-term financial security.”
Making Major Purchases Without Adjusting Their Budgets
The freedom of retirement often triggers a spending urge that can derail even well-planned budgets. New retirees frequently celebrate this milestone with expensive purchases they’ve been dreaming about for years.
“It’s common for individuals transitioning into retirement to feel compelled to make a significant purchase, such as a vacation home, luxury vehicle or other high-ticket item,” Channing said. “These decisions are often driven by a desire to celebrate a milestone or fulfill a long-held aspiration.”
The problem isn’t the desire for nice things. It’s the timing and impact on fixed retirement income.
“Such purchases can place considerable strain on retirement finances, especially when income becomes more fixed and predictable,” Channing explained.
There’s a simple solution. If the purchase is truly essential or deeply meaningful, consider making it during your working years when income is still active and flexible.
“Alternatively, exploring less costly options that still meet the underlying need can help preserve retirement savings while still providing satisfaction,” he suggested.
The key is adjusting your budget before making major purchases, not after. Many new retirees buy first and figure out the financial impact later, which can create lasting problems.
Accessing Retirement Accounts and Social Security Too Early
Impatience often drives one of the costliest mistakes new retirees make. Many people start withdrawing from retirement accounts or claiming Social Security benefits as soon as they’re eligible, despite not knowing the full impact of this move.
“One of the most common financial missteps in early retirement is accessing retirement accounts or claiming Social Security benefits prematurely,” Channing said. “Without a clear understanding of the tax implications and optimal timing, early withdrawals can trigger higher tax liabilities and significantly shorten the lifespan of retirement savings.”
The consequences extend far beyond immediate tax bills. Early withdrawals can affect decades of future income.
“This can be especially detrimental if the funds are needed to last for several decades,” Channing warned.
Retirees who can delay tapping into Social Security and other retirement accounts, particularly beyond their full retirement age, can benefit from delayed retirement credits.
“These credits can substantially increase monthly Social Security payments for life, offering a more secure and predictable income stream,” Channing explained. “Additionally, postponing withdrawals from tax-deferred accounts allows those investments to continue growing, potentially improving long-term financial outcomes.”
Every year you delay Social Security past full retirement age adds about 8% to your monthly benefit until age 70. For someone entitled to $2,000 monthly at full retirement age, waiting until 70 could mean an extra $640 per month for life.
Overlooking Healthcare and Long-Term Care Costs
Healthcare costs often blindside new retirees who assume Medicare will cover everything they need. This assumption can be financially devastating.
“Many retirees mistakenly assume that health insurance or Medicare will fully cover long-term care expenses,” Channing said. “In reality, these programs often fall short, leaving individuals vulnerable to significant out-of-pocket costs if they face an unexpected illness or injury that limits their independence.”
The financial impact goes beyond just medical bills. Inadequate planning can force difficult choices about quality of care and your living arrangements.
“Without proper planning, healthcare and long-term care expenses can strain retirement finances, forcing retirees to settle for limited care options or compromise their preferred living arrangements,” Channing explained.
Personal income sources like pensions, Social Security and investment income may help cover ongoing costs. Government programs such as Medicaid or veterans’ benefits can provide additional support.
“Long-term care insurance is another valuable tool, offering broad coverage at a relatively low premium,” Channing said.
The key is planning before you need care, not after. Once health issues arise, insurance options become limited and expensive.
“Whether through insurance, income planning or a combination of resources, preparing for healthcare and long-term care needs is essential to maintaining both financial stability and quality of life in retirement,” he said.
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This article originally appeared on GOBankingRates.com: I’m a Private Wealth Advisor: 4 Money Mistakes Retirees Make in Their First Year
