About 10,000 people retire daily, and that's just going to accelerate through 2030, when every baby boomer will be over the age of 65. As the end of their earning years draws closer, seniors and soon-to-be retirees should take care to avoid the most dangerous retirement pitfalls. A financially stable life in retirement depends on knowing what not to do with your money and assets as a career winds down. Here's a list of retirement mistakes to avoid.
It's almost never a good idea to make early withdrawals from 401(k) and IRA retirement accounts, which can trigger stiff tax penalties. But many folks make that retirement mistake and have to get by with less. Although some 401(k)s have loan repayment programs, and Roth IRAs allow withdrawal of certain funds without penalty, experts recommend these options only as a last resort in true emergencies.
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The Internal Revenue Service allows larger contributions to tax-privileged retirement accounts for taxpayers 50 and older. When taxpayers hit the big 5-0, they can try to make up for lost investing time by stuffing as much into their retirement accounts as possible. The maximum allowable contribution to an Individual Retirement Arrangement, or IRA, jumped to $7,500 a year from $7,000 for older Americans.
Seniors are particularly vulnerable to financial fraud, and they are common targets for scam artists. Experts recommend that seniors always maintain control of their money and assets and never invest in anything they don't understand. They should also involve a financial adviser or family member in unfamiliar transaction. Finally, they should remember that many scam artists are polite and well-mannered "salespeople" who prey on their fears and offer solutions.
Related: 18 Things You Should Do If You Want to Retire Early
There is no such thing as a risk-free investment, but those with the potential for the biggest gains usually come with higher risks. Young investors can afford to wait out market downturns and other major swings. Retirees can't. When approaching retirement, many experts recommend that investors convert a greater portion of their savings to less lucrative but less volatile investment vehicles such as bonds.
Television watchers have probably seen commercials promising easy money through reverse mortgages. A reverse mortgage can benefit some senior homeowners in some situations, but it also drains a home's equity while accruing a debt that charges interest. Reverse mortgages are often sold on commission by salespeople who downplay the high fees, complicated rules, potential threat to government benefits, and risk of losing a home.
Many Americans continue working after age 65. If they leave their jobs — and their employer-based insurance — they're eligible for Medicare. They must, however, sign up within seven months (it used to be eight) of ending their employment. Failure to meet this deadline could result in a loss of eligibility, lack of coverage, and/or a 10% late-enrollment penalty.
Related: 17 Myths and Misconceptions About Medicare
Older Americans can save money by annually reevaluating their prescription drug benefits — Medicare Part D — during open enrollment, which takes place every year between October and December. Many, however, leave their plans on autopilot and don't account for frequent price changes and premium hikes. By failing to adjust, seniors end up paying more all year long.
Many empty nesters sell their homes and downsize in retirement. Homeowners can reap a tax-free profit of up to $250,000 — $500,000 for married couples — if they understand the IRS rules. The tax exclusion requires the seller to have owned the home for two of the five years before the sale. There are also other requirements regarding tax-filing status and timing, which pre-retirees should understand before listing a house.
There are several ways to cover the cost of a stay in a nursing home or other long-term-care facility without paying out of pocket. Long-term care insurance is one example. Some people may qualify for Medicaid coverage even if they were denied in the past. Others may be able to use a life insurance policy to pay for assisted living.
Many people who enter assisted-living facilities must pay out of pocket until their assets are reduced enough to qualify for state-financed Medicaid. States can try to recoup money paid out through Medicaid by putting a lien on the beneficiary's home or by confiscating other assets after the beneficiary dies. Medicare.gov outlines ways to transfer and protect those assets from the reach of the state.
Most health insurance plans don't cover room and board in long-term care and nursing facilities. But people entering such facilities still need insurance to help pay for medical supplies, doctors' care, and hospital services while they're in the nursing home and will have to pay out of pocket if they've dropped their coverage.
Related: Reduce Your Health Care Costs With These Expert Tips for Seniors
Americans are eligible to apply for Social Security benefits when they turn 62, but they get around 8% more if they wait until 66. If they wait until they turn 70 to apply, they get 32% more. For Americans who have the means, it pays to wait.
Related: No Pension? No 401(k)? How to Get By on Social Security
The single biggest financial regret older Americans report is not saving for retirement earlier, according to a Bankrate survey. Put away $300 a month starting at 25, and you'll have $450,000 at age 65 (assuming 5% interest). Wait until you're 35, and the nest egg shrinks to $250,000. Although there's little that older Americans can do to catch up, they can pass on this wisdom as inheritance to their kids and grandkids as early as possible.