If you're nearing retirement or thinking about it, the last thing you want to do is run into financial setbacks. Unfortunately, many continue to make mistakes again and again.
One of the top mistakes is claiming Social Security too early.
Social Security is only designed to replace about 40% of your working income, according to the Social Security Administration. They add, "Your full retirement age is 67. Starting retirement benefits before your full retirement age (as early as age 62) lowers this percentage, and starting benefits after your full retirement age (up to age 70) increases it."
In addition, eligibility for retirement benefits starts at the age of 62.
But if you wait until your full retirement age, you'll receive 100% of your earned benefits. For every year you wait beyond full retirement up to 70, you can receive another 8% boost to your benefits.
"Everybody thinks Social Security isn't going to be there. Everybody is scared to death, but I wouldn't be," says Orman, as quoted by Kiplinger.com. By claiming early, "you're passing up an 8% increase each year in your Social Security from your full retirement age all the way to 70."
Also, with the average retired worker collecting just $1,979 a month in Social Security, relying on benefits too heavily puts many Boomers at risk financially, especially if they have an unexpected expense pop up.
Even finance coach Dave Ramsey warns against over-reliance on Social Security. For one, the government isn't the most dependable when it comes to your dreams. And two, Ramsey suggests that instead of relying heavily on the government's payments, work to build up your savings accounts.
Baby Boomers are Not Saving Enough for Retirement
About two-thirds of Baby Boomers don't have enough saved for retirement.
"A majority will find themselves with inadequate resources for retirement, and a large majority will either have inadequate resources or are likely to suffer significant strains in retirement," Robert J. Shapiro, a co-author of the study and the chairman of economic consulting firm Sonecon, told CBS News. "This isn't part of the American dream."
In addition, according to Orman, as also quoted by Kiplinger, "You don't want to be partners with Uncle Sam. A big mistake everybody is making leading up to retirement is not taking advantage of the Roth 401(k), 403(b), or Roth IRA."
Some Baby Boomers are also Overlooking Required Monthly Distributions (RMDs)
Missing required monthly distributions (RMD) can be a costly mistake. This is another key reason to check in with your financial advisor often.
Once you reach the age of 73, you're legally required to take your Required Minimum Distributions (RMDs), ensuring the government can collect taxes on your money.
You should also know there is a required beginning date, which is April 1 of the year after the year when you turn 73. So, if I turn 73 in 2025, I would have until April 1, 2026, to take my first RMD, which would cover my RMD for 2025. I would also have to take another RMD by year-end to account for my 2026 RMD as well.
If you do not take your RMD in time, you could see penalties of up to 25% of the outstanding RMD you had to take. It was once as high as 50%.
It ensures the IRS gets its money one way or another.
Some Baby Boomers are even borrowing from 401(K) Accounts
Taking a loan from your retirement account to pay off debt or for something frivolous is a major mistake, even if your plan allows it. Orman warns that you are sacrificing the money's tax-deferred growth and may face a penalty for doing so.
About 33% of middle-class Americans cash in their retirement savings before they retire, notes Kiplinger. But by doing that, they're risking not having enough cash through retirement. Plus, many don't realize that if you withdraw money from your 401(k) before the age of 59.5, you get hit with early withdrawal penalties, which aren't worth it.
Eliminating debt with 401(k) funds is tempting. But again, you'll get hit with at least a 10% penalty for withdrawal before the age of 59.5. Plus, you'll get hit with income tax. It's really not worth the expense or the aggravation of lost retirement funds.
Some Baby Boomers are Not Taking Advantage of Employer Matches
If you don't contribute enough to qualify for employer matching, you're leaving money on the table. Plus, If you have an employer that will match your 401(k), maximize your contributions up to the amount your employer will match. If your employer will match up to 6% of your salary, maximize that. To really build your wealth using that employer match, start early with your employer, even if you can only afford to invest 1% of each check into retirement.
Consider this. Let's say you earn $100,000 a year and that your employer will match 50% of your contributions up to 5% of your salary or $5,000. With your contribution and the employer match, $7,500 is saved every year. Over 30 to 40 years of that, you'll have a solid balance.
In short, no one is perfect when it comes to finances.
But many of us are making mistakes that shouldn't happen - especially if you're working with a financial advisor who knows what they're doing.