5 Pitfalls to Watch Out for in Retirement Planning (And How to Dodge Them)

You've spent decades building your nest egg. You've diligently contributed to your 401(k), maybe set up an IRA or two, and perhaps even dabbled in other investments. But as retirement approaches, the game changes dramatically. The strategies that worked while accumulating wealth often don't translate to the distribution phase.

At BlackFin Wealth Group, we've seen countless pre-retirees stumble into common pitfalls that can derail even the most carefully constructed retirement plans. Let's explore five critical challenges that could blindside you—and more importantly, how to navigate around them.

1. Sequence of Returns Risk: Timing Matters More Than You Think

While building your retirement savings, market volatility is your friend. Dollar-cost averaging means downturns allow you to buy more shares at lower prices. But once you start withdrawing money, this relationship flips completely.

Imagine two retirees with identical $1 million portfolios who both withdraw $40,000 annually (adjusted for inflation). The only difference? They retire in different years.

Retiree A begins withdrawals during a bull market, enjoying several years of positive returns before encountering a downturn.

Retiree B retires just before a significant market correction, forcing withdrawals while portfolio values are declining.

Even if both portfolios average the same return over 30 years, Retiree B could run out of money years earlier than Retiree A—all because of the sequence in which returns occurred.

The average bear market lasts 2.5 years from top to trough and timing your retirement should not be dependent on an up market as a few bear markets have lasted for 4 years.  

How to dodge this pitfall:

• Build a "retirement buffer" of 2-3 years of expenses in cash or short-term fixed income before retiring. This means if you're fully invested in the markets heading into retirement, time to rebalance into short term maturity bonds or if you have a whole life cash value insurance policy (which everyone should have for way more reasons than this), don't sweat the downturns in markets as you have cash growing daily being managed by the best bond traders in the world.

• Consider a "bucket strategy" that segments your portfolio based on when you'll need the money.

• Adjust withdrawal rates dynamically based on market conditions—take less during downturns

• Explore guaranteed income options for a portion of your portfolio with fixed income annuities, guaranteed income, dollars in dollars out.

2. Longevity Risk: The Blessing and Curse of Living Too Long

Medical advances have pushed life expectancies to new heights. While living longer is certainly a gift, it creates a genuine financial challenge: outliving your money.

Consider these sobering statistics:

• A 65-year-old couple today has a 50% chance that at least one spouse will live beyond age 92

• About one in four 65-year-olds will live past age 90

• Nearly one in ten will live past 95

Most retirement calculations use an end date of 85 or 90—potentially leaving retirees financially vulnerable for years or even decades. A lot of stock market only advisors focus on Monte Carlo methods to come up with a percentage of success. The problem with stock market only assets is if you live to 95 and you run out of money in your late 80's, you can not go back to work. This requires planning to prevent this situation.

How to dodge this pitfall:

• Plan for a retirement that could last 30+ years

• Consider longevity insurance (advanced life annuities that begin payments at age 80 or 85). I personally am not a fan of this variety of annuities, as I prefer income annuities paying out at much younger ages, guaranteed for you and your spouse for as long as you both shall live.

• Maintain some growth-oriented investments even in retirement, segmented based on with RMD's and Social Security start up.

• Delay Social Security, if possible and you're healthy—each year you wait between full retirement age and 70 increases your benefit by 8%

• Explore strategies that provide lifetime income guarantees for a portion of your portfolio

3. Inflation: The Silent Wealth Killer

During your working years, inflation was an abstract concept that made groceries and gas gradually more expensive. In retirement, it becomes an existential threat to your financial security.

Even modest inflation can devastate purchasing power over a 20–30-year retirement:

• At 2% inflation: $50,000 today will have the purchasing power of just $30,477 in 25 years

• At 3% inflation: That same $50,000 drops to $23,880 in purchasing power

• At 4% inflation: Your $50,000 will buy only $18,756 worth of goods and services

And remember, certain costs that disproportionately affect retirees such as healthcare, have historically inflated at rates well above the Consumer Price Index.

How to dodge this pitfall:

• Factor higher-than-average inflation rates into retirement calculations, especially for healthcare

• Include inflation-protected investments like TIPS (Treasury Inflation-Protected Securities) in your portfolio

• Consider assets with historically strong inflation-hedging properties

• Consider now before you are retired getting a cash value whole life insurance policy that is overfunded. Dividends keep up with inflation and in fact due to their conservative investments of longer dated bonds tend to pay out higher dividends in the months and years following interest rate cuts as inflation comes down after a season of higher rates.

• Maintain an appropriate allocation to equities throughout retirement

• Review and adjust your withdrawal strategy regularly to account for actual inflation

4. Tax Planning Oversights: The Surprise Tax Bills No One Warned You About

After decades of tax-deferred saving, many retirees are blindsided by the tax implications of retirement distributions. Without proper planning, you could face:

The Social Security Tax Trap

Up to 85% of your Social Security benefits can become taxable once your "combined income" (adjusted gross income + nontaxable interest + half of Social Security benefits) exceeds certain thresholds—currently $25,000 for individuals and $32,000 for married couples filing jointly.

Required Minimum Distribution Shocks

Beginning at age 73 (as of 2023), you must start taking Required Minimum Distributions (RMDs) from traditional retirement accounts whether you need the money or not. These mandatory withdrawals can:

• Push you into higher tax brackets

• Increase Medicare premiums through IRMAA (Income-Related Monthly Adjustment Amount)

• Create a "tax torpedo" effect on Social Security benefits

How to dodge this pitfall:

• Consider Roth conversions during lower-income years before RMDs begin.

• Fill up your tax brackets with these Roth Conversions or just take the money out of your tax deferred accounts using the bracket methods and put the money to work in a tax free or tax friendly set of assets. This money will never be taxed again or taxed minimally forever on and you got it out at a lower tax bracket all by focusing on the timing of the annual withdrawals.

• Develop a multi-year tax strategy that optimizes when you take income from different sources. Markets are up, take some out, markets are down use your whole life cash policies to control the taxes and not have to pull money out of markets in a down market.

• Coordinate Social Security claiming with your overall tax situation and every person or couples age at which they should start Social Security is not the same no matter what any advisor tells you. Family specific on this based on assets and where these assets are sitting.

• Explore Qualified Charitable Distributions (QCDs) to satisfy RMDs without increasing taxable income

• Work with strategic tax professionals who specialize in retirement income planning

5. Healthcare and Long-Term Care Costs: The Budget Buster

Many pre-retirees drastically underestimate what healthcare will cost them in retirement. According to Fidelity's latest estimates, a 65-year-old couple retiring today will need approximately $315,000 just to cover healthcare expenses in retirement—and that doesn't include long-term care.

The long-term care reality is even more stark:

• 70% of retirees will need some form of long-term care during their lifetimes

• The national median cost for a private room in a nursing home exceeds $100,000 per year

• The average length of a long-term care need is about 3 years

• Medicare covers very little long-term care, and Medicaid requires spending down assets

How to dodge this pitfall:

• Budget realistically for healthcare premiums, out-of-pocket costs, and Medicare supplements

• Explore Health Savings Accounts (HSAs) while still working—they offer triple tax advantages

• Consider long-term care insurance or hybrid policies that combine life insurance with long-term care benefits

• Investigate self-funding options if your asset level supports it

• Understand how to properly structure assets if Medicaid might eventually be needed

Planning for Success: Your Retirement Roadmap

Retirement planning isn't just about reaching a magic number in your investment accounts. It's about creating a comprehensive strategy that addresses each of these potential pitfalls before they can derail your retirement dreams.

At BlackFin Wealth Group, we specialize in helping clients navigate these complex challenges. Our approach focuses on creating retirement income plans that:

• Protect against sequence of returns risk

• Account for potential longevity beyond average life expectancy

• Build in realistic inflation assumptions

• Optimize tax efficiency throughout retirement

• Address healthcare and long-term care needs

Retirement should be your reward for decades of hard work and disciplined saving. Don't let these common pitfalls transform your golden years into a financial struggle.

Ready to create a retirement plan that addresses these challenges head-on? Visit our retirement planning specialists or contact us today to schedule a comprehensive retirement readiness review. Your future self will thank you.