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Hitting the $1 million milestone in retirement savings is an incredible achievement, and after a decade-plus of extremely strong U.S. stock market returns, many retirees find themselves in this fortunate position. But even with a substantial nest egg, it’s easy to make financial missteps that could jeopardize your retirement security.
After years of building wealth, retirees may relax a little too much or underestimate the complexity of managing a seven-figure portfolio. Here are four common money mistakes that retirees with over $1 million often make—and how you can avoid them.
1. Underestimating Healthcare Costs
It’s easy to overlook just how much healthcare can cost in retirement. While Medicare provides some coverage, it doesn’t cover everything, and out-of-pocket expenses like premiums, deductibles, and copays can add up quickly. Even with a large portfolio, healthcare can be a major financial burden if you haven’t planned for it.
According to the Fidelity Retiree Health Care Cost Estimate , a couple retiring at 65 can expect to spend over $315,000 on healthcare during retirement. This doesn’t include potential long-term care expenses, which can be even more costly.
How to Avoid It:
- Build healthcare costs into your retirement budget. Consider premiums for Medicare Parts B and D, Medigap policies, and out-of-pocket expenses.
- Consider long-term care insurance or set aside a portion of your savings to cover potential long-term care needs. Even if you never need it, planning for this possibility can prevent unexpected expenses from draining your savings.
- Stay healthy and active. While you can’t control every medical expense, taking care of your health can help you avoid some preventable costs in retirement.
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2. Overspending Early in Retirement
Many retirees enter their 60s eager to enjoy the fruits of their labor—traveling, buying a vacation home, or spending more freely than they did during their working years. With over $1 million saved, it’s easy to think that you have enough to spend liberally. However, overspending in the first few years of retirement can have long-lasting consequences, especially when compounded by market volatility or unexpected expenses down the line.
The sequence of returns risk is also a concern. If you withdraw large amounts early in retirement during a market downturn, you’ll deplete your portfolio faster, leaving less time for it to recover.
How to Avoid It:
- Stick to a sustainable withdrawal rate. The commonly recommended guideline is 4%, but it’s essential to evaluate your specific situation and adjust based on market conditions and your spending needs.
- Create a budget that accounts for both your desired lifestyle and potential future expenses, like healthcare or home maintenance, to avoid depleting your savings too quickly.
3. Not Paying Attention to Tax Implications
With over $1 million in assets, many retirees make the mistake of focusing only on their withdrawal amounts without considering the tax consequences. If most of your savings are in tax-deferred accounts like 401(k)s or traditional IRAs, every withdrawal is subject to income tax. This can push you into a higher tax bracket, increasing your overall tax burden.
Additionally, Required Minimum Distributions (RMDs) begin at age 73, forcing you to take withdrawals from tax-deferred accounts, whether you need the money or not. This can create a tax shock if not planned for properly.
How to Avoid It:
- Diversify your tax exposure by contributing to tax-advantaged accounts like Roth IRAs or Roth 401(k)s, which allow for tax-free withdrawals in retirement.
- Consider Roth conversions before RMDs begin. Converting a portion of your tax-deferred savings into a Roth IRA while you’re in a lower tax bracket can reduce the tax hit in later years.
- Work with a tax advisor or financial planner to develop a tax-efficient withdrawal strategy that minimizes your overall tax burden throughout retirement.
4. Neglecting Inflation
For most of the past 30 years, inflation has been quite low; however, as we've seen since the pandemic, big spikes can happen. Even if inflation cools back closer to its historical average, a 2-3% inflation rate might seem small in any given year, but over the course of a 20-30 year retirement, it can significantly reduce the real value of your savings. Retirees who don’t factor inflation into their long-term financial plans risk finding that their once-sufficient nest egg no longer covers their living expenses.
How to Avoid It:
- Keep some portion of your portfolio invested in stocks or growth-oriented assets that can outpace inflation over time. Even in retirement, it’s essential to have a mix of assets that balance growth and income.
- Consider inflation-protected investments, like Treasury Inflation-Protected Securities (TIPS), which adjust with inflation and can help preserve your purchasing power.
5. Not Updating or Revisiting Estate Plans
Retirees with significant wealth often overlook the importance of keeping their estate plans up to date. If your financial circumstances or family situation have changed—such as inheriting assets, selling property, or new grandchildren being born—an outdated estate plan may not reflect your current wishes. Additionally, without proper planning, a significant portion of your wealth could be lost to taxes or legal fees when passed on to your heirs.
How to Avoid It:
- Review your estate plan regularly—especially after significant life events like retirement, a new grandchild, or changes in tax laws.
- Work with an estate planning attorney and a financial advisor to ensure your will, trusts, and beneficiary designations are up to date and aligned with your wishes.
- Consider tax-efficient ways to pass on your wealth, like gifting or setting up trusts, to minimize the tax burden on your heirs.
More Money, More Problems
While having over $1 million in retirement savings offers incredible financial security, it’s not without potential pitfalls. By understanding these common money mistakes—underestimating healthcare costs, overspending early, ignoring tax implications, overlooking inflation, and neglecting estate planning—you can better protect your wealth and ensure a more secure and comfortable retirement. With careful planning, regular financial check-ins, and professional guidance, you can avoid these missteps and make the most of your golden years.
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