401(k) Mistakes Near Retirement That Can Cost You Everything

The portfolio that built your wealth is not necessarily the right portfolio to sustain your retirement. Many workers in their late 50s and early 60s are still holding aggressive growth allocations — 80–90% equities — that are appropriate for a 35-year-old but dangerous for someone 5 years from retirement.

A 30% market decline at age 62 is not the same as a 30% decline at age 35. At 35, you have decades of contributions ahead to rebuild. At 62, you may be forced to retire into a depleted portfolio — or delay retirement by years. The "retirement red zone" (the 5 years before and after retirement) requires a fundamentally different approach to risk.

Beneficiary designations on your 401(k) and IRA override your will. An outdated designation can send your retirement savings to an ex-spouse, a deceased parent, or the wrong family member — regardless of your current wishes.

This is one of the most common and most preventable estate planning mistakes. Divorce, remarriage, the birth of grandchildren, and the death of named beneficiaries all require beneficiary updates. Many workers set their designations when they first enrolled in the plan 20–30 years ago and never reviewed them.

When workers roll their 401(k) to an IRA, they are sometimes steered into high-commission annuities or other products that are not in their best interest. This is especially common when rolling large balances from industrial employers.

A fiduciary advisor is legally required to act in your best interest. A broker operating under the suitability standard only needs to recommend products that are "suitable" — not necessarily the best option for you. The difference can cost you tens of thousands of dollars in unnecessary fees and surrender charges.

Every dollar you withdraw from a traditional 401(k) or IRA is taxable as ordinary income. Without a withdrawal strategy, retirees often pay far more in taxes than necessary — and may trigger Medicare IRMAA surcharges that increase their healthcare premiums.

The order in which you draw from different accounts — taxable, traditional IRA, Roth — has a major impact on your lifetime tax bill. Many retirees default to drawing from their largest account first, which is often the worst tax strategy.

Sequence of returns risk is the danger that a major market decline in the early years of retirement can permanently damage your portfolio — even if long-term average returns are positive.

When you are withdrawing from a portfolio, losses early on have a compounding negative effect. Two retirees with identical average returns over 20 years can have dramatically different outcomes depending on when the bad years occur. If the losses come in years 1–5, withdrawals during the downturn lock in losses and reduce the base available for future recovery.

Without a deliberate withdrawal sequence, retirees often deplete their tax-deferred accounts too quickly, leaving themselves with large RMDs at age 73 that push them into higher tax brackets.

The general principle is to draw from taxable accounts first, then tax-deferred accounts, then Roth accounts last (to maximize tax-free growth). But the optimal sequence depends on your specific tax situation, Social Security timing, and Roth conversion opportunities.