The Biggest Mistakes People Make in Retirement Planning (And How to Avoid Them)

Social Security benefits can be claimed as early as age 62 or delayed up to age 70, with the monthly benefit increasing significantly for each year of delay. Many people claim early simply because the option is available, without modeling the long-term income implications for themselves or a surviving spouse. The difference between an early and a delayed claim can be substantial over a multi-decade retirement, and the decision cannot be reversed after the first 12 months.

Traditional 401(k) and IRA withdrawals are taxed as ordinary income. For many professionals who have accumulated significant balances in pre-tax accounts, distributions in retirement can push them into higher federal tax brackets, trigger Medicare surcharges (IRMAA), and, in Minnesota, subject a larger portion of their Social Security benefits to state income tax. The order and timing of withdrawals from different account types has meaningful tax planning consequences that are often overlooked until distributions begin.

Healthcare is consistently one of the largest and least-planned expenses in retirement. Fidelity Investments estimates that a 65-year-old couple retiring today may need approximately $330,000 in after-tax savings to cover healthcare costs in retirement (as of 2024), and that figure does not include long-term care. Most employer health coverage ends at retirement, leaving a pre-Medicare coverage gap between early retirement and Medicare eligibility at age 65. That gap period can represent significant unplanned cost for professionals who retire before 65.

Sequence-of-returns risk is the danger that poor portfolio performance in the early years of retirement, combined with ongoing withdrawals, can permanently impair a portfolio even if long-term average returns recover. A portfolio that declines significantly in year one or two of distributions may not recover at the same rate as one where withdrawals have not yet begun. This risk is distinct from average return risk and is specific to the distribution phase, making it a unique challenge for retirees that does not apply in the same way during accumulation.

A retirement plan is not a single investment account or a savings target. It is a written, coordinated strategy that addresses income, spending, taxes, healthcare, estate, and contingencies in one place. Many professionals approach retirement with a general sense of readiness, a portfolio they have watched grow, a Social Security estimate, and a rough budget, but no documented comprehensive strategy that connects these elements. When one piece changes, whether that is a market downturn, a health event, or a tax law change, a plan that exists only in general terms cannot be stress-tested or updated. Ultimately, the goal is financial independence on your terms, and that requires a written framework to build toward.

Many professionals in the Twin Cities metro area work with nationally focused planning resources that do not account for Minnesota's distinct retirement tax environment. Minnesota taxes Social Security benefits for higher-income earners, taxes traditional 401(k) and IRA distributions at ordinary income rates with no broad retirement income exclusion, and imposes an estate tax with a threshold of $3 million, which is significantly lower than the 2026 federal exemption of approximately $13.6 million. Professionals subject to public pension systems such as PERA or TRA should also understand the Rule of 90 eligibility and how pension income may be subtracted from Minnesota taxable income within applicable limits.

Relying on one primary source of retirement income, whether that is a pension, a 401(k), or Social Security alone, creates concentration risk in the income layer of a retirement plan. If that source is disrupted, reduced, or taxed more heavily than anticipated, there is no buffer. Retirement income strategies that seek to draw from multiple sources, such as pre-tax accounts, Roth accounts, taxable savings, and Social Security, may offer more flexibility to adapt to tax law changes, market conditions, or unexpected expenses. Outcomes, of course, depend on individual circumstances and market conditions.

Retirement planning is not complete when you retire. Tax laws change. Healthcare costs shift. Portfolio values fluctuate. Family circumstances evolve. A plan built at age 58 and never revisited is unlikely to serve you well at 68 or 78. Many professionals make an initial plan, implement it, and then disengage from active management, assuming their original strategy remains optimal. Regular, structured quarterly reviews with an advisor are designed to catch what has changed before it becomes costly to correct.