9 Retirement Income Mistakes That Cost More Than You Think
You saved diligently for thirty years. You diversified. You maxed contributions. And now you’re heading into retirement with a solid nest egg and the confident feeling that the hard part is done.
Here’s what most people don’t realize until it’s too late: accumulating wealth and distributing it are completely different skill sets. The accumulation phase rewards patience and consistency. The distribution phase punishes the wrong sequence, the wrong account, and the wrong year. The mistakes are quieter, harder to spot, and often irreversible once they compound.
This piece covers nine of the most expensive income mistakes we see among retirees with $800K to $2.5M in savings. Some are pure strategy errors. Some are traps the tax code set specifically for people in your situation. All of them are avoidable.
The biggest retirement income mistakes aren’t about picking the wrong stocks. They’re about paying unnecessary taxes, drawing from the wrong accounts in the wrong order, and treating planning shortcuts as permanent rules. The most damaging single error is waiting until your 70s to address the “tax torpedo”, the convergence of RMDs, Social Security taxation, and Medicare surcharges that can push effective marginal rates well above what your bracket suggests. Most of these mistakes are preventable in the decade before they hit.
1
Treating the 4% Rule as Gospel Instead of a Starting Point
The 4% rule has a useful origin story: financial planner Bill Bengen, testing every 30-year rolling window of market history, found that withdrawing 4% in year one and adjusting for inflation each year thereafter virtually never depleted a portfolio before 30 years. That was in 1994. Markets, bond yields, and lifespans have all changed.
Morningstar’s most recent “State of Retirement Income” research, published December 2025, now pegs the base-case safe starting withdrawal rate at 3.9% for a 30-year retirement with a 90% probability of success, for a portfolio with 30–50% in equities. That’s $39,000 per year from a $1 million portfolio, not $40,000. More importantly, Morningstar’s research shows that retirees who experienced poor returns in the first five years and did not adjust spending were far more likely to exhaust their savings. That’s the real risk: rigidity, not arithmetic.
Flexible strategies, reducing withdrawals in down years, using a guardrails approach, or coordinating portfolio withdrawals with Social Security timing, can support starting rates as high as 5.7%, the same research finds.
Use 4% as a reference point, not a contract. Build a plan that tells you when to pull back and when you can spend more, rather than locking in a fixed dollar amount regardless of what markets do.
Source: Morningstar, “What’s a Safe Retirement Withdrawal Rate for 2026?”
2
Ignoring the Tax Torpedo Until It’s Too Late to Defuse It
This is the one that’s generating the most conversation in advisor circles right now. The “tax torpedo” is what happens when required minimum distributions begin at age 73 and stack with Social Security income in a way that dramatically raises your effective tax rate, often without you noticing until you get the bill.
Here’s the mechanism: RMD income increases your “provisional income,” which the IRS uses to determine how much of your Social Security benefits are taxable. Once provisional income exceeds $44,000 for married couples (thresholds unchanged since 1983), up to 85% of your Social Security benefits become taxable income. And because those thresholds aren’t indexed to inflation, more retirees fall into this zone every year simply due to cost-of-living adjustments. A retiree nominally in the 22% bracket can see certain dollars taxed at effective marginal rates above 40% once Social Security phase-in effects are layered in.
Add IRMAA Medicare surcharges and the 3.8% Net Investment Income Tax, and a couple with $253,000 in retirement income can face effective rates well above what the bracket table would suggest, as Kiplinger’s May 2026 analysis of the torpedo illustrates in detail.
Waiting until RMDs start at 73 to think about this. By then your options are severely limited.
Use the years between retirement and age 73 to do partial Roth conversions, converting up to the top of your current bracket each year to reduce future RMD balances.
Source: Kiplinger, “How the Tax Torpedo Targets Wealthy Retirees” (May 2026); McKay Wealth Management, “The Tax Torpedo: How Social Security and RMDs Interact” (May 2026)
3
Withdrawing from the Wrong Account First and Triggering IRMAA
Which account you tap first isn’t just a preference, it determines how much you pay in Medicare premiums two years from now. That’s the IRMAA trap, and it catches a surprising number of organized, prepared retirees.
IRMAA (Income-Related Monthly Adjustment Amount) adds surcharges to Medicare Part B and Part D premiums for higher-income beneficiaries. In 2026, surcharges begin at $109,000 MAGI for single filers and $218,000 for married couples filing jointly. Total Part B premiums can reach $689.90 per month, versus the standard $202.90, depending on income tier. The system is cliff-based: one dollar over a threshold triggers the full surcharge for that tier. A $10,000 Roth conversion or an unexpected capital gain in 2024 can raise your 2026 Medicare premiums by thousands of dollars, because the surcharge is calculated using income from two years prior.
The practical implication: before taking a large IRA distribution or doing a Roth conversion, model its effect on MAGI and where it lands relative to IRMAA thresholds. Staying $1 below a cutoff isn’t paranoia, it’s math.
Withdrawal sequencing, which account, in which year, in what amount, is one of the highest-leverage decisions in retirement planning. It’s worth reviewing annually, not just once at retirement.
Source: Kiplinger, “Medicare Premiums 2026: IRMAA Brackets and Surcharges”
“In the 2026 tax torpedo zone, a couple with joint income of $253,000 sits in the 22–24% federal bracket, but the effective rate on certain dollars can exceed 40% once RMDs, Social Security taxation, and IRMAA are stacked together.”
Kiplinger, May 2026 — citing 2026 tax figures
4
Claiming Social Security Too Early Without Running the Numbers
Claiming Social Security at 62 feels like getting paid sooner. And sometimes it is the right call, for those in poor health, those who need the income, or those with limited life expectancy. But for the majority of people reading this, claiming early is one of the most permanent and expensive decisions in retirement.
For each year you delay past your full retirement age (FRA), your benefit increases by 8%, up to age 70. Someone with an FRA of 67 who waits until 70 receives 124% of their base benefit, a permanent increase that compounds with every future COLA adjustment. For a married couple, the calculus gets even sharper: the surviving spouse inherits the higher earner’s benefit. Delaying the higher earner’s claim to 70 can substantially increase the surviving spouse’s lifetime income.
The 2026 COLA of 2.8% (announced by SSA in October 2025) is a reminder that Social Security’s inflation protection is a feature, not an afterthought. Every percentage of benefit you give up by claiming early is also a percentage of every future COLA you’ll never receive.
If you’re in good health with a spouse, model the breakeven point, typically in the late 70s or early 80s, and consider whether bridge income from a brokerage account or part-time work can fund the delay.
Source: Social Security Administration, “Delayed Retirement Credits”; SSA, 2026 COLA Announcement
5
Holding Too Much Cash “for Safety” While Inflation Quietly Works Against You
After decades of accumulation, cash feels safe. It doesn’t drop in value on a Tuesday. You can see it in your account. In the years immediately after retiring, the temptation to keep a large cash cushion, one, two, three years of expenses sitting in a money market, is entirely understandable.
Here’s what it actually costs. The national average savings account yield is forecast to end 2026 around 0.48% APY, according to Bankrate. Even the best high-yield savings rates are declining as the Fed continues cutting. Meanwhile, the inflation rate from January 2025 to January 2026 ran around 2.4%, per Bureau of Labor Statistics data. That’s a negative real return. Healthcare costs for retirees have historically run at 4–6% annually, roughly double general CPI, meaning the cash that felt conservative is actually losing purchasing power every year against the costs that matter most.
A cash reserve of one to two years of expenses is reasonable for sequence-of-returns protection. Much beyond that, and you’re not being cautious, you’re paying an ongoing inflation tax that compounds quietly over a 20 or 30-year retirement.
Source: Bankrate, Savings Account Rate Forecast 2026; U.S. Bureau of Labor Statistics, Consumer Price Index
6
Not Building a Guaranteed Income Floor Before Sequence Risk Hits Hardest
The first five to ten years of retirement are when sequence-of-returns risk is most dangerous. A 30% market decline in year one is far more damaging than the same decline in year twenty, because you’re drawing down a shrinking balance at the same time it’s losing value.
Morningstar’s research found that of retirement plans that failed, nearly 70% failed because of poor returns in the first five years. The antidote isn’t market timing, it’s covering your non-negotiable expenses with income that doesn’t depend on portfolio performance. Social Security covers some of this floor. Pensions cover some of it. For the gap, a simple “bucket” structure, keeping near-term income needs in short-duration bonds or CDs, separate from the long-term growth portfolio, means you aren’t forced to sell equities in a down market to pay this month’s bills.
The J.P. Morgan 2026 Guide to Retirement identified generating sufficient income and managing spending volatility as the top two concerns of retirees, which is exactly what a guaranteed floor addresses.
Before you retire, identify the dollar gap between your guaranteed income (Social Security, pension) and your essential expenses. That gap is what your portfolio needs to cover, and covering it with low-volatility assets first provides real protection where it matters most.
Source: TheStreet, citing Morningstar research (March 2026); J.P. Morgan Asset Management, 2026 Guide to Retirement
7
Missing the Roth Conversion Window Between Retirement and Age 73
For many people, the years between their last paycheck and their first RMD are the lowest-income, lowest-tax years of their adult lives. This window, often ages 60 to 72, is one of the most valuable opportunities in retirement planning, and a surprising number of people let it pass unused.
The logic is straightforward: convert portions of your traditional IRA or 401(k) to a Roth IRA each year, paying tax now at a lower rate to avoid larger tax bills later when RMDs force withdrawals at potentially higher rates. Roth withdrawals don’t count toward provisional income for Social Security taxation purposes. They don’t affect IRMAA calculations. They don’t generate RMDs in your lifetime.
The One Big Beautiful Bill Act, signed in July 2025, permanently extended current tax brackets, meaning the 22% and 24% brackets aren’t going away. That clarity makes multi-year Roth conversion planning more reliable than it has been in years. A married couple with the enhanced standard deduction of $32,200 in 2026, plus the temporary $12,000 senior deduction for those 65+, has meaningful headroom for tax-efficient conversions, if they plan for it before the RMD clock starts.
Source: Chris Reddick Financial Planning, “Navigating the Tax Torpedo, Roth Conversions, and OBBBA”; Income Laboratory, Roth Conversion Strategy Guide 2026
8
Overlooking Qualified Charitable Distributions as an RMD Tool
If you’re charitably inclined and taking RMDs, there’s a provision in the tax code that does something remarkable: it lets you satisfy your RMD and keep the distribution entirely out of your taxable income.
A Qualified Charitable Distribution (QCD) is a direct transfer from your IRA to a qualified charity. In 2026, the annual limit is $111,000 per person, or $222,000 for a married couple where both spouses are over 70½, each with their own IRA. The distribution counts toward your RMD but never appears in your adjusted gross income, unlike a regular IRA withdrawal followed by a separate charitable gift. The downstream effects can be significant: lower AGI can reduce how much of your Social Security benefits is taxable, keep you below an IRMAA threshold, and reduce exposure to the 3.8% Net Investment Income Tax.
You must be at least 70½ to use a QCD, and the transfer must go directly from your IRA custodian to the charity, you can’t withdraw the funds yourself first. QCDs cannot be used for donor-advised funds or private foundations.
If you’re over 70½, plan to take your RMD this year, and already give to charity, ask your IRA custodian about QCDs before year-end, the deadline is December 31.
Source: Fidelity, “Qualified Charitable Distributions (QCDs)” (2026); Northern Trust, “Qualified Charitable Distributions from IRAs” (2026)
9
Planning in Isolation Instead of Integrating Tax, Income, and Healthcare Costs Together
Each of the mistakes above looks manageable in isolation. The reason they’re so expensive in practice is that they interact. A Roth conversion that seems efficient from a bracket-filling standpoint looks very different once you factor in its effect on provisional income for Social Security, IRMAA thresholds two years forward, and the 3.8% NIIT. An RMD strategy that minimizes income tax in year one might create a different problem in year two.
This is where the limits of rules of thumb become real. The tax torpedo isn’t obvious from the bracket table. As one recent Kiplinger analysis put it, a Roth conversion at the visible 12% rate can carry an effective marginal rate well above 40% once Social Security phase-ins and Medicare surcharges are factored in. The only way to find the true optimum is to model the complete picture, income sources, account types, withdrawal order, timing, and tax impacts, simultaneously and across multiple future years.
Healthcare is the other variable people chronically underestimate. Medical inflation for retirees has historically run at 4–6% annually, roughly double general CPI. Planning for healthcare costs as a distinct, faster-growing line item, rather than assuming they track general inflation, is a meaningful difference over a 25-year retirement.
Retirement income planning is not a one-time event. It’s an annual process that responds to changes in your health, tax law, portfolio value, and spending needs. If your current plan isn’t reviewed at least once a year, it’s already outdated.
Common Questions
What is the tax torpedo in retirement?
The tax torpedo is a spike in effective marginal tax rates that hits retirees when RMDs push income high enough to trigger three overlapping taxes simultaneously: up to 85% of Social Security benefits become taxable, IRMAA Medicare surcharges kick in, and the 3.8% Net Investment Income Tax may apply. A retiree nominally in the 22% bracket can find their true marginal rate on certain dollars exceeds 40%. Strategic Roth conversions in the years before RMDs begin are the primary defense, and the window is narrower than most people realize.
What is a safe withdrawal rate from a retirement portfolio in 2026?
Morningstar’s 2025 “State of Retirement Income” research recommends a 3.9% starting safe withdrawal rate for a 30-year retirement at a 90% probability of success, for a portfolio with 30–50% in equities. That’s roughly $39,000 per year from a $1 million portfolio. Flexible spending strategies, like reducing withdrawals in down years or using a guardrails approach, can support starting rates as high as 5.7%, according to the same research. The right rate for your situation also depends on age, other income sources, and spending flexibility.
What income triggers IRMAA Medicare surcharges in 2026?
In 2026, IRMAA surcharges apply to single filers with MAGI above $109,000, and married couples filing jointly above $218,000. The surcharges are cliff-based: one dollar over a threshold triggers the full surcharge for that tier. Total Part B premiums range from $284.10 to $689.90 per month. Crucially, 2026 surcharges are based on your 2024 tax return, so a large conversion or capital gain two years ago can affect what you pay for Medicare today.
When should I take Social Security to maximize lifetime benefits?
For most people in good health with a spouse, delaying Social Security to age 70 is financially optimal. Benefits increase by 8% per year beyond full retirement age, so someone with an FRA of 67 who waits until 70 receives 124% of their base benefit, permanently. That higher base also compounds with future COLA adjustments. The right answer depends on health, life expectancy, income needs, and tax strategy. There is no universal rule, which is exactly why this decision benefits from proper modeling before you make it.
What is a Qualified Charitable Distribution and how does it help with RMDs?
A QCD is a direct transfer from your IRA to a qualified charity. In 2026, the limit is $111,000 per person. QCDs count toward your RMD but are excluded from taxable income entirely, unlike a regular IRA withdrawal followed by a separate charitable gift. This can lower your AGI, reduce the taxable portion of your Social Security benefits, and help keep you below IRMAA thresholds. You must be at least 70½ to use one, and the transfer must go directly from your IRA custodian to the charity. QCDs cannot fund donor-advised funds or private foundations.
Rules of thumb only get you so far. Retirement income planning is genuinely personal, the right withdrawal sequence for a 63-year-old couple with a pension looks nothing like the right strategy for someone relying entirely on a portfolio. If you’d like to talk through how any of this applies to your situation, the team at Madison Partners is happy to have that conversation. No obligation, no pitch, just a clear-eyed look at the decisions in front of you.
This content is for educational purposes only and should not be considered financial, tax, legal, or investment advice. Individual circumstances vary, and readers should consult with a qualified financial advisor, tax professional, or attorney before making decisions based on this information. Madison Partners does not guarantee the accuracy of third-party data cited herein.
