9 Ways You’re Blowing Your Retirement Savings

If these actions sound familiar, you may want to make some changes

Donna Fuscaldo,

AARP

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En español

Published June 22, 2022

/ Updated June 05, 2023

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If worrying about running out of money in retirement is keeping you up at night, you aren’t alone. Untold numbers of older adults have that concern, and for good reason. Inflation is still elevated, interest rates are rising and people are living longer. All of which means your money has to work harder to last.

“Everybody is losing sleep” about retirement, says Bryan Kuderna, a certified financial planner. “It’s definitely a bigger one for women, who have longevity in their genes.”

You can’t control inflation and interest rates, but you can take steps to control how long your money lasts in retirement. If any of the actions below sound familiar, it may be time for a reset.

1. Too much spending in the early days of retirement

Your entire working life was spent amassing money for retirement, so who can blame you if you want to spend it early on. But do too much of that and you may run into problems down the road. “One of the big things we see is as soon as people retire, they treat every day like it’s Saturday,” says Kuderna. “They go into retirement projecting their expenses today will stay that way the rest of their lives. A few extra vacations and trips with family and friends, and before they know it, they spent their retirement account in year one or two.”

How to fix it? Rein in your expenses or get a part-time job to supplement your income. Not sure where to begin? AARP’s Money Map helps you create a budget and build emergency savings.

2. Gifting too quickly

It’s natural to want to help your children and grandchildren out, but too much of a good thing can leave you penniless. Before you book that cruise for the entire family or give your child the down payment for a home, make sure you can afford to. “The rule of thumb I tell my clients is first make sure you’re taking care of yourself financially,” says Matthew Curfman, a certified financial planner and president and co-owner of Richmond Brothers. “If you don’t take care of yourself, you can’t help others financially.”

How to fix it: Learn to say no, at least for now. Make sure you have enough cash in the bank to live comfortably in retirement, and then lend a helping hand.

3. Upsizing instead of downsizing

Some people go into retirement with the intention of downsizing to a smaller home but then end up doing the opposite. Instead of saving on housing, they spend more. “They think they will downsize and will have all this equity from the house, so they buy a little condo up north and a little condo down south to do the snowbird thing. And all of sudden they didn’t downsize, they changed the situation,” says Kuderna.

How to fix it: Don’t treat the equity in your home as a windfall. Count it as an income stream you can live off of in retirement.

4. No long-term care plan to speak of

Close to 70 percent of Americans 65 and older will need long-term care in their lifetime, according to the Urban Institute and the U.S. Department of Health and Human Services. Some have family members to rely on, but close to half will need to pay for long-term care on their own, and many have no plan to do so. “It’s a pretty expensive proposition to need a full-time nursing home or at-home care,” says Curfman. “If you do nothing and something happens, you’ll have to pay for it somehow.”

How to fix it: Add long-term care coverage to your retirement savings plan. Depending on your situation, it may mean setting aside money, getting a long-term care insurance policy, or working with a financial adviser to devise another tax-efficient strategy. If you’re more the DIY type, check out Ace Your Retirement, a chatbot that asks you questions and offers up retirement advice.

5. You have a lot of debt

Lingering or new debt can be a big blow to your retirement savings. It may have been easy to manage when you were collecting a paycheck, but it can hurt your cash flow and lifestyle when you’re on a fixed income.

How to fix it: Try not to bring any debt with you into retirement. If you do, work on paying it off and resist accruing new debt.

6. You’re living on pretax income

Taxes are a big consideration when you begin withdrawing money from your retirement savings account. If it’s a traditional 401(k) or IRA, withdrawals are taxed as ordinary income. “It has a ripple effect on your overall tax situation and cash flow,” says Kuderna. “That $1 million is suddenly $700,000. It’s not going to last as long.”

How to fix it: Move some of your retirement savings into a Roth IRA or convert your traditional 401(k) into a Roth 401(k). With both investment vehicles, you don’t pay taxes on withdrawals once you’ve had the account for five years and are 59½ or older. Keep in mind that the conversion is a taxable event.

7. Investments aren’t keeping up with inflation

The great wealth-eroding factor has always been inflation. That’s worse in 2022, with inflation running at a 40-year high of 8.6 percent. Diminishing purchasing power isn’t the only problem in high inflationary environments. Your investments have to work harder to hold their value over the long haul.

“People entering retirement at 65 think they should be all cash or fixed income,” says Kuderna. “That money is for when they are 80. It can be in the markets and keeping pace with inflation.”

How to fix it: With inflation soaring, a portfolio checkup may be in order to ensure your investments are allocated properly. The goal is a well-diversified portfolio that has just the right amount of risk.

8. You aren’t paying attention to interest rates

Over the past 18 months, the Federal Reserve has raised interest rates in an effort to tame inflation. For many retirees, it’s been a nonevent, especially if they aren’t looking to purchase a home or take out a loan. But ignoring rising interest rates could mean you are leaving potential gains on the table, especially if your money is in a checking account or stashed under the mattress. “Many clients have gotten complacent, leaving money in checking and savings even as interest rates go up,” says Kuderna.

How to fix it: If your money is languishing in a low-interest-bearing checking or savings account, Kuderna says to consider moving it into a fixed annuity, treasury or CD — the latter are getting close to a 5 percent return. “All three are guaranteed products as long as you hold it for the duration,” says Kuderna.

9. You sell your home without a plan

Property values soared during the pandemic, prompting lots of retirees to cash out. The problem arises when they sell their home and have no plan for where to live next. Sure, they are flush with cash, but with mortgage rates rising, purchasing a new abode may no longer be affordable. “Either they get stuck with renting with really high rates or they don’t know where to go,” says Kuderna. Some retirees may even be forced to move in with their children. “What was a windfall now isn’t,” he says.

How to fix it: Retirees need to have a plan beyond putting their home on the market. Ask yourself: Where do you intend to go? Can you rent for a short time while you look for a new place? And how do you feel about paying extra given current interest rates? “Selling at a high is good, but buying high cancels that out,” says Kuderna.

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Donna Fuscaldo is a contributing writer and editor focusing on personal finance and health. She has spent over two decades writing and covering news for several national publications including The Wall Street Journal, Forbes, Investopedia and HerMoney.