Common Financial Mistakes Made Prior to Retirement
Preparing for retirement takes decades of discipline and planning. Yet even the most diligent savers make costly mistakes that can delay financial freedom. Avoiding these errors becomes more critical as you approach retirement since you have less time to recover. By recognizing and addressing these pitfalls early, you can protect your savings and secure your financial future.
Starting Too Late
According to a 2025 study by Northwestern Mutual, only 25% of Americans with retirement savings have the equivalent of one year or less of income saved. Among Gen X, 52% have just three times or less their annual income saved. Failing to start early and harness the power of compounding is one of the biggest retirement mistakes.
Compounding occurs when investment returns generate their own earnings over time. Two investors contributing the same amount for the same duration can end up with vastly different outcomes depending on when they start.
- Jake contributes $1,000 per month beginning at age 25 and stops after 10 years. Earning 7% annually, he’ll have about $1.5 million by age 65.
- Megan contributes the same amount starting at 45 and stops after 10 years. At the same 7% return, she’ll have about $375,000 by age 65.
Both invested $120,000, but Jake’s money compounded for 40 years while Megan’s had only 20. Start as soon as possible, even with small contributions, and increase your savings whenever your income allows.
Being Too Conservative
Avoiding risk might feel safe, but in retirement planning, it can erode your wealth. Over the last century, the S&P 500 has averaged a 10% annual return. Meanwhile, low-risk vehicles such as CDs often yield below inflation. When inflation runs 2–3% and your CD pays less, your purchasing power declines by 1–2% yearly.
This fear of loss often prevents investors from taking advantage of market growth. Avoiding risk doesn’t eliminate it—it merely shifts the risk to your money losing value over time. Work with your financial advisor to define your goals and assess how much risk you can tolerate. Adjust your portfolio periodically as your needs and life circumstances evolve.
Withdrawing Retirement Funds Too Early
Emergencies happen, but withdrawing from your retirement account before age 59½ can be expensive. Early withdrawals trigger a 10% penalty plus federal and often state income taxes.
For instance, a Maryland resident in the 22% tax bracket who withdraws $30,000 to pay debt would owe roughly $3,000 in penalties and additional taxes—losing thousands before seeing a dollar. The greater cost is the lost growth. A $30,000 withdrawal earning 7% annually could grow to about $42,000 in five years if left untouched.
There are limited exceptions—first-time home purchases (up to $10,000), qualified education or adoption expenses, and certain medical costs. Some plans allow loans that must be repaid. Always view early withdrawals as a last resort.
Ignoring Employer Matching or Contribution Limits
If your employer offers a retirement plan match, take full advantage of it. It’s free money that can significantly boost your savings. Vanguard’s How America Saves report found that the average employer match equals 4.6% of pay, with the most common formula being 50% on the first 6% of contributions.
For example, if your employer matches 100% of contributions up to 5% of your salary, contributing that 5% effectively doubles your savings rate to 10%.
Contribution limits for 2025 are:
- 401(k), 403(b), 457(b), SAR-SEP: $23,500 (plus $7,500 catch-up for ages 50+, and $11,250 for ages 60–63)
- SIMPLE 401(k)/IRA: $16,500 (plus $3,500 catch-up for ages 50+)
- Traditional and Roth IRA: $7,000 (plus $1,000 catch-up for ages 50+)
Even modest increases in contributions can make a significant difference over time.
Acting as a Bank for Others
Helping loved ones financially can feel rewarding but may jeopardize your own retirement. A Pew Research Center survey found that only 45% of young adults aged 18–34 are fully financially independent. Another study from Savings.com revealed that half of parents financially support at least one adult child—often at the expense of their own financial security.
If you’re withdrawing from retirement accounts to help family, remember that it increases taxable income and can trigger early withdrawal penalties. It’s important to set boundaries and prioritize your long-term financial goals over short-term generosity.
Claiming Social Security Too Early
You can begin receiving Social Security benefits at age 62, but doing so reduces your monthly benefit by up to 30% for life. Waiting pays off: for each year you delay past full retirement age (up to 70), your benefit increases by 8%.
If possible, stay employed a few years longer or explore part-time work to bridge the gap. After age 70, there’s no additional benefit to waiting. Since Social Security should supplement—rather than replace—your income, coordinate your claiming strategy with a financial planner to maximize long-term benefits.
Living Beyond Your Means
Modern life makes overspending easy. Social media and constant exposure to luxury lifestyles can fuel “keeping up with the Joneses” habits. Yet living beyond your means can destroy your retirement plans.
As of July 2025, TransUnion reported the average American carried $6,492 in credit card debt, and U.S. credit card balances hit $1.21 trillion, according to the Federal Reserve. With interest rates often exceeding 20%, debt can snowball quickly.
Building financial discipline today ensures you won’t outlive your money later. Focus on needs over wants, avoid high-interest debt, and redirect those funds into long-term savings.
Final Thoughts
Avoiding these common financial mistakes before retirement can help you maintain stability and achieve the future you envision. Work with a trusted fee-only fiduciary financial advisor to create a plan that grows with you and supports your goals.
To learn more about building a secure retirement strategy, contact Main Street Advisors at 410-840-9200 or visit www.mainstadvisors.com.
