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Over the next few years, more than 4 million Americans will reach the age of 65 each year, according to a study from the Alliance for Lifetime Income and the Retirement Income Institute. But is this demographic, deemed “peak boomers,” ready for retirement? The study revealed that more than half (52.5%) of baby boomers nearing the age of 65 have less than $250,000 in assets for retirement.
Even if you have millions saved, you can still fall victim to financial mistakes that can eat into your retirement savings. Whatever your portfolio looks like right now, avoid these traps if you’re preparing for retirement in 2026.
Tapping Into Retirement Accounts Too Early
You’ve saved and invested for retirement throughout your career. Now that the day has come, you might think it’s time to tap into your 401(k) or IRA immediately.
But experts said this is a mistake. “Doing so early can trigger taxes and penalties,” said Tansley Stearns, Community Financial Credit Union president and CEO. “Not only does this reduce your retirement nest egg, but you also lose out on potential growth.”
Instead, speak to a financial advisor about the best ways to stretch your retirement income through other forms of savings.
Claiming Social Security Too Soon
Likewise, many retirees are tempted to tap into Social Security benefits as soon as they turn 62. But this leads to a permanent reduction in your monthly benefits, according to experts.
Lisa A. Cummings, Esq., attorney and executive vice president at Cummings & Cummings Law, recommended using the Social Security benefit calculator online to compare your monthly benefit at your current age, full retirement age (FRA) and age 70.
“Waiting until full retirement age, or even later, can mean significantly more income for life,” Cummings said.
Underestimating Taxes
“Taxes don’t disappear when your paycheck does,” Cummings pointed out. “Withdrawals from traditional IRAs, 401(k)s and certain pensions are taxed as income. Social Security may also be taxable.”
Before you make a move, speak with a tax advisor to estimate your annual taxable income and consider tax strategies that can reduce those obligations, such as Roth conversions.
Choosing the Wrong Asset Locations
Strategic asset location, or the practice of getting investments into the right types of accounts, is another way to minimize taxable income in retirement, according to experts.
“For most people, we want to locate the assets we expect to grow the most (e.g., stocks) in Roth accounts, if available. This way, all of the future growth would not be taxed, as Roth accounts grow tax-free and distributions from Roth accounts are also tax-free,” said Aaron Brask, financial planner at Aaron Brask Capital.
He also suggested placing some higher-growth assets in a taxable brokerage account, which would be taxed at the capital gains rate — typically lower than the marginal tax rates for income. “Asset location is a subtle but impactful tax strategy that many people miss,” he said.
Overvaluing Your Investments
You don’t want to see your retirement income disappear due to taxes. But you also don’t want to see your investments diminish in a down market. The stock market inevitably has ups and downs. Can your retirement portfolio weather those changes?
“We might be on a bull market run, and people see these big [balances in their] accounts, so they might retire early,” said Mark Connely, CFP with Wealth Design Group in Houston, Texas. He recommended doing a “stress test” to see what would happen if your portfolio dropped by 20% or more. Can you live comfortably on that amount?
“Take 70% of the value you have right now and see if it delivers the income you want,” Connely suggested. “Also, make sure you’ve got three to five years of income set aside somewhere safe, secure and liquid so that even if there was a market correction, you can wait it out.”
Ignoring Inflation
While it’s smart to keep an emergency savings account to help manage market swings, you want to make sure most of your investments can keep pace with inflation over time. “Ensure your retirement strategy includes investments that outpace inflation to maintain your standard of living,” Stearns said.
Cummings recommended working with an investment advisor to choose allocations that can offset rising costs. “Review yearly to adjust as needed,” she said.