Some retirement mistakes can go unnoticed. They might show up years later as a higher tax bill, a portfolio that never got back to where it was, or a single stock that has grown into a larger share of the portfolio than anyone intended.
In this short video, Mike Ptaszenski, Matt Fatz, and Steve Erfle each walk through one mistake they see often, and what they look at when it comes up.
Transcript
3 Common Retirement Mistakes to Avoid
Nobody plans to make a mistake with their retirement, but after years of doing this work, we still see the same handful of avoidable ones, and they can cost people real money.
Hi, I’m Mike Ptaszenski, one of the co-founders here at Thrive Wealth Management, and today I’m joined by two of my colleagues, Matt Fatz and Steve Erfle. Each of us will walk you through one mistake we see again and again, and more importantly, what we look at when someone comes to us with it.
Retirement Mistake #1: Missing Low-Tax Years After Retirement
I’ll start with the mistake I often see, which is doing nothing with the low tax years right after retiring. For many people, there’s a stretch after the paycheck stops where Social Security hasn’t started yet, required withdrawals from retirement accounts haven’t started either, and their taxable income can be unusually low. It’s a short timeframe, and people may miss it because they assume that the hard part is over once they’ve stopped working.
How Social Security, Required Withdrawals, and IRMAA Can Affect Retirement Taxes
In some instances, the accounts that got them there stay exactly as they were, and nobody revisits how the money is being taxed. That stretch doesn’t last long, though. Once required withdrawals and Social Security begin, that income gets added to whatever else you have coming in, which might push you into a higher tax bracket and may even increase your Medicare premiums through a surcharge called IRMAA.
Using Low-Income Retirement Years for Roth Conversions
So when we see someone retire with almost everything in pre-tax 401(k)s, one thing that we often do is map out their tax rate year by year and then use those low-income years to identify opportunities to move money into a Roth account while their income is still low. The idea is to smooth out a lifetime tax bill rather than let it spike all at once. If you’re in that stretch now, or you can see it coming, those years may offer real opportunity.
Consider looking at how much you could move out of pre-tax accounts today each year while your income is still low.
Retirement Mistake #2: Retiring as Soon as You Hit Your Savings Target
Hi, I’m Matt Fatz, financial planner at Thrive, and the mistake I often see is retiring as soon as your retirement savings hit a target without ever testing the timing. Someone might reach the retirement savings number they’ve been working towards for years and assume they’re set.
Why Sequence of Returns Risk Matters in Retirement
What they may miss, though, is that when you retire can affect the outcome as much as how much you’ve actually saved. If the market drops in your first few years while you’re pulling money out of your portfolio to live on, you’re selling shares at low prices and those losses become permanent. Two people can earn the same average return over 20 years and end up in very different places depending on whether the bad years came early or late in their retirement.
Preparing for Market Volatility Early in Retirement
So when someone is approaching that decision, one thing we often look at is setting aside a couple years’ worth of cash and bonds which typically don’t swing the way markets do. If the market falls early on, we want that money to live on instead of selling stocks at a loss, giving the rest of the portfolio time to recover. Hitting your savings number doesn’t necessarily protect you from bad timing.
Consider testing your retirement date against a rough first few years rather than an average one.
Retirement Mistake #3: Holding Too Much Company Stock
Hi, I’m Steve Erfle, co-founder at Thrive, and the mistake I often see is people retiring with too much of their net worth tied to a single stock, usually an employer’s. It’s common for pharma and tech executives because company shares keep arriving year after year through stock awards, options, purchase plans, and the 401(k) match.
The Risks of Concentrated Stock Positions in Retirement
Very few people decide to put half their money in one stock. It accumulates that way, and then selling feels disloyal or the tax bill on selling looks painful, so it sits there. In some cases, that one stock may represent 30, 40, even 50% of net worth, right when a bad year for that company is hardest to absorb because a paycheck is no longer there to offset it.
How Gradual Diversification Can Spread Out the Tax Impact
So when we see someone approaching retirement with that much in one stock, one thing we often look at is a schedule to sell down gradually over several years, which can spread the tax bill across several tax years instead of one. And if those shares have grown a great deal in value inside a 401(k), there’s a tax rule called net unrealized appreciation that can let part of that growth be taxed at the lower capital gains rate instead of the higher rate for regular income. That’s something we’d look at as well.
Net Unrealized Appreciation and Company Stock in a 401(k)
Holding that much of one company can carry more risks than many people would choose. Consider a plan to sell it down gradually with the tax consequences mapped out before your retirement. That’s the mistake I see most often, but step back from all three of these for a moment, and something they have in common starts to show up.
Why Coordinated Retirement Planning Matters
Each one is avoidable, but it takes someone looking at your whole situation at once. Many people have their investments in one place, their taxes handled by someone else, and their estate documents with a third person. None of those three people are talking to each other.
Coordinating Retirement, Tax, and Estate Planning
That’s how a low tax window may be missed, or a retirement date may be picked without anyone checking the timing. As an independent fiduciary firm, we can coordinate your retirement plans with your other professionals, so you’re not the one carrying information between your advisor, your accountant, and your attorney. And if you recognize yourself in any of these retirement mistakes, let’s talk about it.
Reach out to us via our website or call us at 215-376-5530.
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