Suze Orman, the New York Times best-selling author of “The Ultimate Retirement Guide for 50+,” podcaster, finance guru and motivational speaker, has seen it all when it comes to retirement mistakes.
In her nearly forty years as a financial adviser, people have come to her when they’ve spent too much money, paid too much in taxes, or made hasty decisions that lost them too much money.
But the biggest mistake, the one that Orman sees all the time, the one that people lose thousands of dollars over, is claiming Social Security early.
What constitutes early for Orman? Claiming anytime before at least your full retirement age, which is 67 for anyone born after 1960.
“Everybody thinks Social Security isn’t going to be there. Everybody is scared to death, but I wouldn’t be,” says Orman. 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.”
You may not think delaying filing for Social Security makes that big a difference in terms of your benefit amount, but it could add up to a lot more money than you realize. The maximum a 62-year-old can receive monthly in 2025 is $2,831. If that person waits until they turn age 66/67 to file for benefits, their monthly check increases to $4,018. If they hold off until age 70, their check increases to $5,108.
Don’t let fear cost you money
Many people collect Social Security early out of fear it won’t be around for much longer. But Orman doesn’t think that’s a viable reason to claim benefits. While it’s true that the Old-Age and Survivors Insurance Trust Fund, which pays Social Security retiree benefits, is projected to become insolvent in the first quarter of 2033, that doesn’t mean it will collapse. If nothing is done by then, benefits would face a 23% cut, and beneficiaries would then receive 77% of their benefits.
Sure, if you have a serious illness or need the money to get by, then you may have to collect Social Security early. But otherwise, collecting Social Security before you’ve at least reached your full retirement age can backfire, leaving you short on cash over your lifetime. Retirement can last 20 years or more for many people.
“They find out it’s a lot more expensive in retirement than they thought,” says Orman. They are spending the same, if not more, and they are dealing with inflation. At the same time, they are withdrawing from their retirement accounts and depleting their savings. Their Social Security payment is already locked in at a lower rate, and it’s not enough. As a result, they are now either forced to change their lifestyle or return to work, she says.
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The better option, says Orman, is to wait to file for benefits.
“Where else are you going to make that money? You’re not,” says Orman. “Claiming Social Security before full retirement age is one of the biggest mistakes you could possibly make.”
Suze Orman has been advising people about finances for decades.
(Image credit: MARC ROYCE)
Second place: ignoring the Roth option
In wanting to be generous with Orman’s advice, we are also sharing her second-place all-time mistake — and this one is geared toward pre-retirees.
Ignoring the Roth conversion
“You don’t want to be partners with Uncle Sam,” says Orman. “A big mistake everybody is making leading up to retirement is not taking advantage of the Roth 401(k), 403(b), or Roth IRA.”
Pre-retirees and retirees like traditional 401(k)s, funded by pre-tax dollars, because they get a tax break now while they’re still working and potentially are in a higher tax bracket than when they retire. They figure their income tax bracket will be lower when they are retired and start withdrawing from their retirement accounts.
But what some people don’t take into account are required minimum distributions or RMDs, says Orman. RMDs kick in when you turn 73 and require you to withdraw a percentage of your 401(k) or IRA each year. The withdrawal is treated as ordinary income, which can be a big tax hit if the RMD is large enough.
“The money in your retirement account is compounding and growing and it’s growing and it’s growing for you and Uncle Sam,” says Orman. “Why do you think Uncle Sam is allowing you that long (before RMDs). Because the more time it’s in there, the larger it grows, the more they are going to get in income taxes.”
Don’t forget your heirs
From an estate planning standpoint, it’s also a mistake to ignore a Roth conversion, says Orman.
That’s because non-spousal beneficiaries of an inherited 401(k) or IRA must withdraw all funds from the account and pay the taxes within ten years.
“If you give up that tax write-off today, the money you leave your kids gets to grow tax-free and they don’t have RMDs later on in life,” says Orman.
Remember, a Roth conversion is a taxable event; You should contact a financial adviser and/or a tax professional before making any moves. If you retire and are in a high tax bracket, another option may be the better choice.
“I don’t care how old you are, if you’ve gone back to work and are making $20,000 or $30,000, if your employer offers it, get it,” says Orman. “A big mistake you’ll make is not taking advantage of the Roth IRA.”
Live and learn with Orman
From saving to estate planning, Orman has seen it all when it comes to retirement mistakes.
(Image credit: MARC ROYCE)
Other mistakes Orman has seen over her illustrious career include:
- Living above your means: “You have to live below your means and within your needs.”
- Buying a life insurance annuity: “People go to these retirement seminars, get a free dinner, and end up walking away with a life insurance annuity product. It’s a huge mistake that so many of you make.”
- Not having a revocable living trust: “Everybody thinks in terms of death. Death is easy. What is not easy is an incapacity. I see it all the time.”
- Assuming you’ll always have an income: “Everyone thinks I don’t have to save today, I’ll always have an income coming in, until they don’t.”
Nobody’s retirement is perfect. There are many bumps along the way, and mistakes are bound to happen.
But hopefully, this bit of advice from Orman can make the journey a little smoother.