The 5 Biggest Retirement Income Mistakes People Make in Their First Year

Fact-checked by the Prime Rate editorial team

According to research from Fidelity Investments, one of the most common and costly retirement income mistakes involves withdrawal timing: specifically, pulling money from the wrong accounts in the wrong order during the first 12 months of retirement. That single error can shave years off a portfolio’s lifespan and cost a household tens of thousands of dollars in unnecessary taxes. The first year of retirement is not a grace period for figuring things out. Every financial decision made during that window carries outsized consequences.

The scope of the problem is significant. A 2023 study from the Employee Benefit Research Institute found that nearly 45% of retirees spent down assets faster than expected in their first three years. Meanwhile, the Social Security Administration reports that roughly 48% of Americans still claim Social Security benefits at or before age 62, despite the permanent reduction that comes with early claiming. Combine that with the fact that IRS required minimum distribution rules now trigger at age 73 with potentially steep penalties for non-compliance, and it becomes clear that newly retired Americans are facing a gauntlet of decisions most were never trained for.

This guide breaks down the five biggest retirement income errors that surface in year one, explains why each one happens, and gives you a concrete framework for avoiding them. By the end, you will know how to sequence withdrawals, time benefits, manage taxes, and protect yourself from a market downturn hitting at exactly the wrong moment.

Claiming Social Security Too Early

The decision of when to claim Social Security is one of the few truly irreversible financial choices a retiree makes. As the Consumer Financial Protection Bureau’s retirement planning tool puts it, the age at which you claim permanently affects your lifetime monthly benefit amount and survivor benefits. That permanence is what makes early claiming so damaging.

If your full retirement age is 67 and you claim at 62, your benefit is reduced by approximately 30%. Conversely, every year you delay past full retirement age adds 8% in delayed retirement credits, up until age 70. For someone with a $2,000 monthly benefit at full retirement age, claiming at 62 nets roughly $1,400 per month. Waiting until 70 delivers $2,480 per month. Over a 25-year retirement, that gap compounds to well over $300,000 in total lifetime income.

Why So Many People Claim Early

The most common reason is anxiety about portfolio volatility. When markets are choppy or a retiree simply wants “certainty,” locking in Social Security income feels prudent. The problem is that this logic inverts the real risk: Social Security is an inflation-adjusted, guaranteed income stream backed by the federal government. Using it as a security blanket early, while simultaneously drawing down an investment portfolio, often leaves retirees worse off on both fronts.

Health considerations legitimately justify early claiming for some people. But for the majority of Americans reaching retirement age in reasonably good health, life expectancy projections favor delaying. A 65-year-old man today has a median life expectancy of about 84; a 65-year-old woman, 87. The break-even point for delayed claiming is typically reached somewhere between ages 78 and 82, and most retirees surpass it.

Spousal and Survivor Benefit Coordination

The higher earner in a couple delaying until 70 also protects the surviving spouse. When one partner dies, the survivor inherits the larger of the two benefits. This makes delaying the higher earner’s benefit one of the most effective forms of longevity insurance available, particularly for women, who statistically outlive their husbands by an average of five years.

The table above assumes a $2,000 benefit at full retirement age and a 25-year retirement. Actual outcomes depend on individual earnings records and cost-of-living adjustments, but the directional difference is consistent across nearly all realistic scenarios.

Ignoring Withdrawal Sequence and Account Order

Most retirees hold assets in at least three types of accounts: taxable brokerage accounts, tax-deferred accounts like traditional IRAs and 401(k)s, and tax-free accounts like Roth IRAs. The sequence in which you draw from these buckets has a profound effect on your lifetime tax bill and portfolio longevity. Yet many newly retired Americans default to a single-account strategy, draining whichever account is most convenient rather than most tax-efficient.

The conventional wisdom is to spend taxable accounts first, then tax-deferred, then Roth. This preserves tax-free Roth growth as long as possible and allows strategic Roth conversions in the early retirement years when income is often low. But this general rule needs to be calibrated against each household’s specific situation, including current bracket, expected future RMDs, and Social Security income.

The Cost of Getting This Wrong

Consider the practical arithmetic. A retiree who draws $80,000 per year entirely from a traditional IRA, while leaving Roth and taxable accounts untouched, may be paying 22–24% federal income tax on all of that income unnecessarily. A smarter approach might involve taking $40,000 from the IRA, $20,000 from a taxable brokerage account (where only capital gains are taxed, often at 0–15%), and $20,000 from a Roth (completely tax-free). Same gross income, dramatically different tax outcome.

Understanding how Roth accounts fit into your overall strategy is foundational to this kind of planning. Our comparison of Roth IRA vs. Traditional IRA covers the fundamental trade-offs in detail, and they apply directly to withdrawal decisions, not just contribution choices.

Bracket Management as a Core Strategy

The gap between a retiree’s early years (before Social Security, before RMDs) and later years (both sources active simultaneously) is often the best window for bracket management. During early retirement, taxable income is frequently low. Strategically filling up the 12% or 22% bracket with Roth conversions or IRA withdrawals during this period can reduce the tax drag from future large RMDs. The retirees who recognize this window and use it methodically often end up with six-figure lifetime tax savings.

Underestimating the Tax Burden in Retirement

There is a widespread belief that retirement means entering a lower tax bracket. For many people, that holds true early on, but within a few years, the combination of Social Security benefits, RMDs, investment income, and pension payments can push taxable income higher than expected. Taxes in retirement are not a fixed destination; they are a moving target that requires active management.

Up to 85% of Social Security benefits are taxable if your combined income exceeds $34,000 for single filers or $44,000 for married couples filing jointly. “Combined income” includes adjusted gross income, nontaxable interest, and half your Social Security benefit. A retiree receiving $24,000 in Social Security and $30,000 in IRA distributions is almost certainly triggering the 85% inclusion threshold, meaning most of that Social Security income appears on a tax return.

Medicare Surcharges: The Hidden Tax Nobody Talks About

The Income-Related Monthly Adjustment Amount, better known as IRMAA, adds a surcharge to Medicare Part B and Part D premiums when income exceeds certain thresholds. In 2025, these surcharges begin at modified adjusted gross income above $103,000 for individuals and $206,000 for couples. The surcharges are based on income from two years prior, which means a one-time Roth conversion or large capital gain in year one of retirement can trigger elevated Medicare premiums in year three.

This is a cost that often blindsides retirees. The Part B premium alone can jump from $185 per month to over $560 per month at higher income tiers. For a couple, that represents an additional $9,000 or more per year in healthcare costs, just from Medicare premiums.

Failing to Account for Sequence-of-Returns Risk

Sequence-of-returns risk is the danger that a market downturn in the early years of retirement, combined with ongoing withdrawals, can permanently impair a portfolio even if long-term average returns are acceptable. This is not theoretical. A retiree who experiences a 25% portfolio loss in year one and continues withdrawing $50,000 per year may exhaust their assets a full decade earlier than a retiree who experienced the same average return but in a different order.

Charles Schwab’s retirement income guidance makes this clear: poor sequence-of-returns risk in the first years of retirement, combined with failing to hold cash reserves and short-term bonds, can permanently deplete a portfolio far sooner than anticipated. The mathematical reality is that selling assets at depressed prices to fund living expenses locks in losses that cannot be recovered.

The Two-Year Cash Buffer

A practical and widely recommended defense is maintaining a cash or near-cash reserve equal to one to two years of living expenses. This buffer allows a retiree to cover withdrawals without selling equities during a downturn, giving the portfolio time to recover. A CD ladder strategy can serve this function effectively: staggering certificate of deposit maturities to provide predictable liquidity at regular intervals while earning competitive interest rates.

The goal is not to hold excessive cash (which loses purchasing power to inflation over time) but to create a short-term bridge. Think of it as protecting the first two years of withdrawals from market timing risk, while leaving equities undisturbed to participate in any recovery.

Portfolio Allocation in Year One

Many financial planners recommend reducing equity exposure in the 12 to 24 months before and after retirement, sometimes called the “retirement risk zone.” A portfolio that was 80% stocks at age 55 probably warrants rebalancing toward 50–60% stocks by the time withdrawals begin. This is not permanent de-risking; it is tactical protection during the period of maximum vulnerability.

Missing Required Minimum Distributions

Required minimum distributions are not optional, and the penalties for missing them are severe. The IRS requires that retirees begin taking RMDs from traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k)-type plans at age 73. The penalty for failing to take the correct amount used to be a 50% excise tax on the shortfall; the SECURE 2.0 Act reduced that to 25%, and to 10% if corrected promptly. Even at the reduced rate, this is a significant cost.

The calculation is based on your account balance on December 31 of the prior year divided by a life expectancy factor from IRS actuarial tables. The factor changes annually, meaning the RMD amount is recalculated each year. For someone with a $1 million IRA balance at age 73, the first-year RMD is approximately $36,496. Missing this distribution means a $9,124 penalty, even at the reduced 25% rate.

The First-Year RMD Timing Trap

There is one exception to the standard April 15 tax deadline: the first RMD can be delayed until April 1 of the year following the year you turn 73. This sounds helpful, but it has a hidden trap. Taking the first and second RMDs in the same calendar year (because you delayed year one) doubles the taxable income in that year, potentially pushing you into a higher bracket, triggering IRMAA surcharges, and increasing the taxable portion of Social Security benefits all at once.

For most retirees, taking the first RMD in the calendar year they turn 73, rather than waiting until April 1 of the following year, avoids this income bunching problem. It is one of those small timing decisions that carries outsized tax consequences.

Inherited IRAs and the 10-Year Rule

The SECURE Act of 2019 and SECURE 2.0 changed the rules for non-spouse beneficiaries who inherit IRAs. Most non-spouse beneficiaries must now fully distribute the inherited IRA within 10 years of the original owner’s death. For a retiree whose parent leaves them a large IRA, this can create significant taxable income in an already complex tax situation. Planning for inherited account distributions in year one of retirement is often overlooked entirely.

Locking Into a Rigid Withdrawal Rate

The 4% rule has been a useful starting point in retirement planning for decades. But treating it as a fixed, unchanging withdrawal rate is a different matter entirely. Retirement portfolios, market conditions, and personal spending needs all change. A flat withdrawal rate applied mechanically year after year ignores this reality.

The opposite problem is equally real. Retirees who spend aggressively in year one, funding travel and large purchases while feeling financially flush, sometimes discover three or four years in that their portfolio cannot sustain that pace. Early retirement often features higher discretionary spending (“go-go years”), which tapers as physical energy decreases. Building that arc into a spending model, rather than assuming flat spending for 30 years, produces more accurate and actionable projections.

Dynamic Withdrawal Strategies

Several alternative frameworks exist beyond the static 4% rule. The “guardrails” approach adjusts withdrawals up or down based on portfolio performance relative to thresholds, capping upside spending and requiring cuts when the portfolio drops below a floor. Another approach, the “floor and upside” strategy, covers essential expenses with guaranteed income (Social Security, annuities, pension) and uses the portfolio only for discretionary spending, leaving it more aggressive and less sensitive to sequence risk.

Regardless of which framework a retiree chooses, the critical point is to have one, to revisit it annually, and to connect it to an actual budget. Our guide to creating a monthly budget that works provides a practical framework that applies equally well in retirement as it does during accumulation years.

Underestimating Healthcare Costs

Healthcare is consistently the retirement expense that retirees underestimate most severely. According to Fidelity’s 2024 estimate, a 65-year-old couple retiring today can expect to spend approximately $315,000 in out-of-pocket healthcare costs over the course of retirement, roughly $157,000 per person. That figure covers Medicare premiums, deductibles, copayments, and out-of-pocket expenses, but excludes long-term care.

Long-term care costs add another layer. The median annual cost of a private room in a nursing facility exceeded $100,000 in 2024. Home health aide services ran $60,000 to $75,000 per year in many markets. Medicare covers very little of this. Most retirees assume Medicare is comprehensive; in reality, it does not cover custodial care, most dental work, vision, or hearing aids.

The Bridge Years Before Medicare

Retirees who leave employment before age 65 face a gap period where they are ineligible for Medicare. Bridging that gap with marketplace coverage through the Affordable Care Act can cost $500 to $1,500 per month depending on age, location, and plan selection. ACA subsidies can help, but only if income is managed carefully: exceeding 400% of the federal poverty level in 2025 (approximately $60,240 for a single person) eliminates premium tax credits entirely.

This is where Roth conversions in early retirement can either help or hurt. Keeping modified adjusted gross income below the ACA cliff while also doing strategic conversions requires precise income modeling, not rough estimates. Many newly retired people find this balance genuinely difficult without professional guidance.

Roth Conversion Errors and Timing Pitfalls

Roth conversions are a genuinely powerful tax tool when used correctly. They are also frequently misused, particularly in the first year of retirement when retirees are eager to act on advice they have been reading about for years. The core idea is sound: convert pre-tax traditional IRA or 401(k) funds to a Roth IRA, pay income tax now, and enjoy tax-free growth and withdrawals later. But execution details determine whether the strategy delivers value.

Converting too aggressively in a single year can push income into a higher tax bracket, trigger IRMAA surcharges two years later, and cause Social Security income to become substantially taxable all in the same filing period. The efficient conversion strategy is almost always spread across multiple years, calibrated to fill specific tax brackets without breaching any threshold.

The Five-Year Rule and Roth Conversion Timing

Each Roth conversion starts its own five-year clock before the converted principal can be withdrawn tax-free and penalty-free. For a 63-year-old converting $50,000 today, that converted amount is not freely accessible until age 68. This matters for retirees who might need to access funds before 59½ (where a different set of exceptions applies) or who have not yet held a Roth IRA for five years at all.

For those new to the mechanics of Roth accounts generally, our comparison of Roth IRA vs. Traditional IRA account types covers the tax trade-offs clearly, including how conversions interact with contribution rules.

Coordination With Future RMDs

One of the most compelling reasons to do Roth conversions in early retirement is to reduce future RMD pressure. A retiree with $1.5 million in a traditional IRA at age 65 faces significant mandatory distributions beginning at 73. Each year of conversions before 73 reduces the balance subject to RMDs, which in turn reduces forced taxable income later. The question of how much to convert is a multi-variable calculation, but the directional logic is straightforward: smaller future RMDs mean more tax flexibility in later life.

Your Action Plan

1. Model your Social Security break-even before claiming anything

   Before filing for Social Security, calculate the break-even age for your specific benefit amount at different claiming ages. Use the SSA’s online calculators or a financial planning tool to estimate lifetime income at 62, 67, and 70. If you are in good health and have other income sources to bridge the gap, delaying almost always produces a better outcome. Spousal coordination matters: the higher earner should nearly always delay to 70 to maximize survivor benefits.

2. Map your account withdrawal sequence for at least five years

   Identify which accounts you will draw from, in what order, and at what amounts, across your first five years of retirement. Build a simple spreadsheet that shows taxable income by year, including projected Social Security, pension income, IRA withdrawals, and Roth conversions. Flag any year where income approaches a key threshold: the 22% bracket entry, IRMAA surcharge levels, or ACA subsidy cliffs.

3. Build a two-year cash or near-cash buffer before your retirement date

   Assemble a liquid reserve covering 12 to 24 months of expected withdrawals in cash, high-yield savings, or short-term CDs before you stop working. This buffer insulates you from being forced to sell equities during a market downturn in year one or two. Consider a CD ladder as one component of this buffer, especially in periods where CD rates offer meaningful returns without locking up all your liquidity at once.

4. Calculate your RMD schedule and set a calendar reminder

   Determine your first required minimum distribution amount using the IRS Uniform Lifetime Table and your December 31 prior-year IRA balance. Decide whether to take it in the year you turn 73 or by April 1 of the following year, accounting for the income bunching risk. Set an annual calendar reminder for October or November to calculate that year’s RMD amount and ensure it is satisfied before December 31.

5. Price out healthcare costs through age 65 and beyond

   If you retire before Medicare eligibility, get actual quotes for ACA marketplace coverage at your anticipated income level. Factor in deductibles, out-of-pocket maximums, and premium costs. Model what a long-term care event would cost in your area and consider whether a hybrid life insurance policy or a dedicated reserve makes sense for your situation. Add a healthcare inflation factor of 5–7% per year to any long-term projections.

6. Execute a bracket-aware Roth conversion strategy in years one through seven

   Identify the gap between your current taxable income and the top of the 12% or 22% bracket. Fill that gap with annual Roth conversions without breaching any threshold that triggers IRMAA, Social Security taxation step-ups, or ACA subsidy loss. Work with a CPA or CFP who can model these interactions; the tax coordination involved is genuinely complex and the stakes are high enough to warrant professional input.

7. Adopt a dynamic withdrawal framework rather than a fixed percentage

   Replace a static 4% rule with a spending framework tied to portfolio value and life circumstances. Review your withdrawal rate annually against a set of guardrails: if your portfolio has grown above a ceiling trigger, allow a modest increase; if it has dropped below a floor, reduce discretionary spending. This approach extends portfolio survival probability significantly compared to mechanically applying any fixed percentage regardless of market conditions.

8. Review your plan with a fiduciary advisor at the one-year mark

   After your first full year of retirement, sit down with a fee-only fiduciary financial planner to audit your actual versus projected spending, review your tax return for any unintended income spikes, and stress-test your plan against a 20–30% market decline. Year one generates real data that should inform adjustments to years two through five. Treating the first-year plan as permanent rather than a starting point is itself a costly mistake.

Frequently Asked Questions

What is the single most costly retirement income mistake in year one?

Claiming Social Security too early, combined with drawing heavily from tax-deferred accounts simultaneously, is the combination most likely to produce permanently lower income over a 25- to 30-year retirement. Each error compounds the other: early Social Security locks in a reduced benefit while large IRA withdrawals create unnecessary tax drag. The two mistakes together can cost a retiree $200,000 to $400,000 in lifetime after-tax income.

How does sequence-of-returns risk actually affect my portfolio?

Sequence-of-returns risk means that the timing of returns matters as much as the average return. If your portfolio drops 25% in year one and you withdraw $50,000 to cover living expenses, you have sold assets at their lowest point. When the market recovers, you have fewer shares to participate in that recovery. The damage is permanent in a way that a loss later in retirement, when withdrawals have slowed, is not. Maintaining a cash buffer and rebalancing into equities during downturns rather than selling them is the primary defense.

Should I take my RMD as early in the year as possible or wait until December?

Waiting until late in the year gives your account the maximum time to grow before the distribution is taken. However, if you plan to do charitable giving, taking part of your RMD early in the year and directing it as a qualified charitable distribution can reduce your adjusted gross income. Most financial planners suggest reviewing RMD timing in the context of your overall tax strategy rather than defaulting to one time of year automatically.

Can I avoid taxes on RMDs entirely?

You cannot eliminate RMD income taxes from traditional retirement accounts, but you can reduce them. Qualified charitable distributions allow retirees age 70½ or older to direct up to $105,000 per year (in 2025) from an IRA directly to a qualified charity, satisfying the RMD requirement without the amount appearing as taxable income. This is one of the most tax-efficient strategies available for charitably inclined retirees.

What is the “4% rule” and does it still work in 2025?

The 4% rule, developed by financial planner Bill Bengen in 1994, holds that retirees can withdraw 4% of their portfolio in year one of retirement, adjust that dollar amount for inflation each year, and expect a high probability of not outliving their money over a 30-year retirement. As of 2025, many researchers argue this rule is still reasonable as a starting point for a 60/40 portfolio, though some suggest a slightly lower initial rate of 3.3–3.8% given current valuations and interest rate uncertainty. The rule is a planning benchmark, not a guarantee.

When should I start planning for healthcare costs in retirement?

Ideally, healthcare cost planning should begin five to ten years before your target retirement date. The most time-sensitive piece is the “bridge” from your employer coverage to Medicare at age 65. If you retire before 65, you need a funded plan for marketplace or COBRA coverage immediately. Longer term, a rough long-term care contingency reserve of $150,000 to $300,000 per person, whether in a dedicated account, hybrid insurance product, or home equity, should be part of your financial plan by your late 50s.

How do Roth conversions interact with Social Security taxation?

Roth conversions increase your modified adjusted gross income in the year they are executed. Higher MAGI means more of your Social Security benefit may become taxable: up to 50% of benefits are taxable when combined income exceeds $25,000 for singles (or $32,000 for couples), and up to 85% when combined income exceeds $34,000 for singles (or $44,000 for couples). This means a Roth conversion can create a “phantom tax” effect where the conversion not only adds its own taxable income but also makes more Social Security income taxable simultaneously.

Is it ever smart to claim Social Security early?

Yes, in specific circumstances. Retirees in poor health with a shortened life expectancy have legitimate reason to claim early since the break-even calculation may not favor delay. Those who have no other income source and genuinely need the income to meet basic expenses may also have no practical choice. Additionally, a lower-earning spouse in a couple sometimes benefits from claiming early while the higher earner delays, particularly when the age gap between spouses is large. These are case-specific decisions that deserve careful modeling, not a blanket rule.

What is the best way to set up a cash buffer for sequence-of-returns protection?

Most financial planners recommend holding 12 to 24 months of expected portfolio withdrawals in cash equivalents or short-term fixed income. High-yield savings accounts, money market accounts, and short-term certificates of deposit are all appropriate vehicles. The goal is capital preservation and accessibility, not growth. Some retirees prefer a formal “bucket” strategy, dividing assets into a short-term liquid bucket, a medium-term bond-heavy bucket, and a long-term equity bucket, replenishing from back to front as years pass.

How do I know if I need a financial advisor for retirement income planning?

The interactions between Social Security timing, RMD management, Roth conversions, ACA subsidies, IRMAA surcharges, and sequence-of-returns risk are genuinely complex. Most people benefit from at least a one-time comprehensive financial plan with a fee-only fiduciary advisor at the start of retirement. This is not a sales pitch for ongoing advisory fees; a one-time planning engagement costing $2,000 to $5,000 can easily pay for itself many times over in tax savings and improved income strategy. Look for a CFP who charges by the hour or flat fee rather than a percentage of assets under management.