The 7 Biggest Financial Mistakes Seniors Make (and How to Fix Them)
Now that we’ve covered the basics, let’s explore the most common and costly senior mistakes in managing money. By recognizing these traps, you can take proactive steps to avoid them.
Mistake 1: Claiming Social Security at the Wrong Time
As we saw, claiming Social Security early at age 62 locks in a lower monthly payment for life. While it can be tempting to get that money sooner, it’s often not the optimal financial move, especially if you are in good health and expect to live a long life. Many people underestimate their longevity and regret not waiting for a larger check that provides more security later in life, especially after a spouse passes away.
How to Avoid It: Don’t make a snap decision. Analyze your entire financial picture. Consider your health, your family’s history of longevity, whether you plan to continue working, and if you have other sources of income (like a pension or retirement savings) to live on while you delay benefits. A higher, inflation-protected Social Security benefit can be one of the best forms of longevity insurance there is.
Mistake 2: Ignoring or Miscalculating RMDs
Forgetting to take your RMD from your retirement accounts is a surprisingly common and expensive error. The penalty is severe: the IRS can charge a 25% tax on the amount you were supposed to withdraw but didn’t. This can be reduced to 10% if you correct the mistake in a timely manner, but it’s still a significant and completely avoidable loss.
Example: If your RMD for the year is $8,000 and you forget to take it, the IRS could impose a penalty of $2,000 (25% of $8,000). That’s money you’ve simply given away for nothing.
How to Avoid It: Be proactive. Ask your financial institution or custodian to calculate your RMD for you each year. Many will even let you set up automatic withdrawals to be sent to your bank account. Mark the December 31 deadline on your calendar and set a reminder for yourself in early fall to ensure you have plenty of time to act.
Mistake 3: Underestimating Healthcare and Long-Term Care Costs
Many seniors are unprepared for just how much of their budget will be consumed by healthcare. A healthy 65-year-old couple retiring today can expect to spend hundreds of thousands of dollars on healthcare throughout their retirement—and that figure doesn’t even include long-term care. Assuming Medicare will cover everything is a major financial planning oversight.
How to Avoid It: Budget realistically for healthcare. When you enroll in Medicare, carefully review your options between traditional Medicare with a Medigap supplement and a Medicare Advantage plan to see what best fits your needs and budget. More importantly, have a plan for long-term care. This could involve purchasing long-term care insurance, setting aside specific funds in a savings or investment account, or discussing options with your family.
Mistake 4: Having an Inappropriate Investment Mix
Retirement investing is about balance. Two common mistakes lie at opposite ends of the spectrum.
- Being Too Conservative: Fearing market volatility, some seniors pull all their money out of stocks and put it into cash, CDs, or other “safe” investments. The problem is inflation. If your money earns 1% interest but inflation is 3%, your savings are losing 2% of their purchasing power every year.
- Being Too Aggressive: On the other hand, continuing to take big risks with a portfolio heavy in stocks can be disastrous. A major market downturn right after you retire can deplete your nest egg without giving you the time to recover your losses.
How to Avoid It: Work toward a balanced portfolio that includes a mix of stocks for growth (to beat inflation) and bonds or other fixed-income assets for stability and income. A common rule of thumb is the “Rule of 100,” where you subtract your age from 100 to determine the percentage of stocks you should hold. For example, a 70-year-old might aim for 30% in stocks and 70% in bonds. This is just a guideline; your personal risk tolerance is what truly matters.
Mistake 5: Neglecting Essential Estate Planning
No one likes to think about it, but failing to plan for what happens after you’re gone can create enormous financial and emotional stress for your loved ones. If you pass away without a will, state law will decide how your assets are distributed, and it may not be what you would have wanted. Furthermore, without a designated power of attorney for finances and healthcare, your family may face a difficult court process to manage your affairs if you become incapacitated.
How to Avoid It: Put your wishes in writing. At a minimum, every adult should have a will, a durable power of attorney, and a healthcare proxy (or living will). These documents ensure your assets are distributed according to your wishes and that someone you trust can make decisions for you if you cannot. Review these documents every 5-10 years or after any major life event, like a marriage, death, or birth in the family.
Mistake 6: Not Creating a Realistic Retirement Budget
Your expenses change in retirement. You might spend less on commuting and work clothes, but you may spend more on travel, hobbies, and healthcare. Many people enter retirement assuming their spending will drop dramatically, only to find that it stays the same or even increases in the early, more active years. Living without a budget on a fixed income is like driving without a map—you will eventually get lost.
How to Avoid It: Before you retire, and certainly once you have, track your spending for three to six months to see where your money is actually going. Use this information to create a detailed, realistic budget. List all your income sources (Social Security, pensions, investment withdrawals) and all your expenses. This clarity will allow you to make adjustments and ensure your spending aligns with your income, preventing you from drawing down your savings too quickly.
Mistake 7: Co-signing Loans for Children or Grandchildren
It is natural to want to help your family. But co-signing a loan for a car, a mortgage, or a student loan is one of the riskiest financial moves a senior on a fixed income can make. When you co-sign, you are not just a character reference—you are 100% legally responsible for the entire debt if the primary borrower stops paying. Lenders often ask for a co-signer precisely because they don’t believe the primary borrower can handle the loan alone. A sudden demand to repay a large loan could completely derail your retirement.
How to Avoid It: Say no, and explain why your fixed income makes it impossible to take on that risk. There are other ways to help that don’t jeopardize your financial security. You could offer a small, fixed amount of cash as a gift, help them create a budget to save for a down payment, or provide non-financial support like babysitting so they can work more hours.
