The five mistakes that derail most lower-income retirement plans

Lower-income workers face retirement planning obstacles that higher earners do not: less money to save, less access to employer pensions, and more pressure to spend what they have now. But the mistakes that hurt retirement most are not about how much you earn — they are about decisions you can control. The five most common ones are waiting too long to start saving, ignoring tax-advantaged accounts you may have access to for, borrowing from retirement savings early, not understanding Social Security timing, and failing to plan for healthcare costs before Medicare begins.

Each of these mistakes costs money you cannot get back. A $5,000 withdrawal from a retirement account at age 40 costs you not just the $5,000 but decades of growth on that money. Claiming Social Security at 62 instead of 67 can reduce your lifetime benefit by $100,000 or more. Missing a tax credit because you did not know about it means paying taxes you did not owe. The good news is that understanding these mistakes before you make them lets you avoid them.

Key Takeaways

  • Starting to save even $50 or $100 per month in your 40s or 50s builds a cushion that makes a real difference, because you still have years for the money to grow.
  • The Saver's Credit (Retirement Savings Contributions Credit) returns money to lower-income savers who contribute to IRAs or 401(k)s, but you have to claim it on your tax return.
  • Withdrawing from a 401(k) or IRA before age 59½ usually costs you a 10 percent penalty plus income tax, and the tax bill can push you into a higher tax bracket.
  • Claiming Social Security before your full retirement age reduces your monthly payment permanently, and the reduction is larger than most people expect.
  • Healthcare costs between retirement and age 65 (when Medicare starts) can drain savings quickly, so planning for this gap matters as much as planning for retirement itself.

Waiting until your 60s to start saving for retirement

The biggest mistake is thinking it is too late to save once you reach 40 or 50. It is not. Even if you have saved nothing until now, ten years of regular contributions builds real money. A person who saves $100 per month from age 55 to 65 in a regular savings account has $12,000. In an IRA earning even 2 percent annually, that same $100 per month grows to roughly $12,700. In a workplace 401(k) earning 4 percent, it grows to about $13,200. That is not retirement, but it is a buffer that keeps you from having to work longer or cut deeper into Social Security.

The math works because you still have time. Someone who saves $200 per month from age 50 to 67 contributes $40,800 of their own money. If that money grows at 3 percent per year, it becomes roughly $50,000. That is real money in a retirement account. The person who waits until 65 and saves the same $200 per month for two years contributes $4,800 and has roughly $4,850 — a difference of $45,000 from waiting just five years.

The barrier for most lower-income workers is not understanding where to save or thinking they need a large amount to start. You can open an IRA at most banks and brokerages with no minimum deposit. Many employers offer 401(k)s with no minimum contribution. If your employer matches contributions — even 1 or 2 percent — that is information programs you should take.

Not claiming the Saver's Credit on your tax return

The Retirement Savings Contributions Credit, also called the Saver's Credit, is a tax credit that returns money to people who save for retirement and earn below a certain income. For 2024, you can claim it if you earned less than $68,250 (single) or $136,500 (married filing jointly). The credit is worth up to $1,000 per person, and it is in addition to any employer match or growth on your savings.

The credit works like this: you contribute to an IRA, a 401(k), or another retirement account. When you file your tax return, you claim the credit on Form 8880. The IRS then returns a percentage of what you contributed — 10, 20, or 50 percent depending on your income. A person earning $35,000 who contributes $2,000 to an IRA might receive a $1,000 credit. That is a 50 percent return on the money they saved, when ready.

Most lower-income workers do not claim this credit because they do not know it exists or they file taxes through a free program that does not ask about it. If you use tax software or a tax preparer, ask specifically whether you may have access to for the Saver's Credit. If you file through a free program like VITA (Volunteer Income Tax information), the volunteer should ask about retirement savings. If they do not, mention it.

Withdrawing from retirement accounts before age 59½

A 401(k) or traditional IRA withdrawal before age 59½ triggers two costs: a 10 percent early withdrawal penalty and income tax on the amount withdrawn. A person who withdraws $10,000 at age 50 pays $1,000 in penalty plus income tax on the $10,000, which could be another $1,200 to $2,400 depending on their tax bracket. That means $10,000 becomes $6,400 to $7,800 in their pocket, and they lose decades of growth on the full $10,000.

The penalty exists for a reason: to discourage you from treating retirement savings as an emergency fund. But lower-income workers often have no other savings, so the temptation is real. Before you withdraw, know your alternatives. If you have a 401(k) and still work for that employer, you may be able to take a loan against the balance instead of withdrawing it. You repay the loan with interest, but the interest goes back into your account, and there is no tax penalty. If you have an IRA, you can withdraw contributions (not earnings) without penalty at any age, though this is rarely a good option because you lose the growth.

If you face a genuine emergency — medical bill, eviction, job loss — and have no other way to pay, a withdrawal is better than going into high-interest debt. But treat it as a last resort, not a first option. Many lower-income workers raid retirement savings for reasons that could have been solved another way, and they regret it later.

Claiming Social Security too early without understanding the cost

Social Security lets you claim as early as age 62, but claiming early permanently reduces your monthly payment. The reduction is not small. If your full retirement age is 67 and you claim at 62, your monthly payment is roughly 30 percent lower for life. If your full retirement age is 66 and you claim at 62, the reduction is roughly 25 percent. Over a lifetime, the difference is enormous. A person may have access to to $2,000 per month at age 67 receives only $1,400 per month if they claim at 62 — a loss of $600 per month, or $7,200 per year, for the rest of their life.

Many lower-income workers claim at 62 because they need the money now or because they believe Social Security will run out. Both are understandable, but the math is worth understanding. If you claim at 62 and live to 80, you receive roughly $432,000 total. If you wait until 67 and live to 80, you receive roughly $480,000 total — $48,000 more, even though you started collecting later. If you live past 80, the advantage of waiting grows larger.

The decision depends on your health, your other income, and whether you have dependents. If you have serious health problems and family history suggests you will not live past 75, claiming early may make sense. If you are healthy and have no other income, waiting as long as possible usually pays more. If you have a spouse, the decision is more complex because spousal and survivor benefits depend on when you claim. Consider meeting with a Social Security representative before you claim — they can show you the numbers for your specific situation.

Ignoring healthcare costs between retirement and age 65

Medicare begins at age 65, but most people retire before then. If you retire at 62 or 63, you face three to four years of healthcare costs with no Medicare. This gap is expensive and often overlooked in retirement planning. Health insurance for an individual under 65 costs $400 to $800 per month depending on your age, location, and the plan. For a couple, it can be $800 to $1,600 per month. Over three years, that is $14,400 to $57,600 out of pocket.

You have options. If you retire before 65, you can buy coverage through the Affordable Care Act (ACA) marketplace. If your income is low enough, you may receive a subsidy that reduces the premium. A person retiring at 62 with $25,000 in annual income might pay $100 to $200 per month for coverage instead of $400 to $600, because the subsidy covers the difference. You have to enroll during the open enrollment period (usually November through January) or within 60 days of a may have access to life event like retirement.

If you have a spouse who still works, you may be able to stay on their employer plan until you turn 65. Some employers allow this; others do not. Ask your spouse's HR department before you retire. If you are a veteran, you may may have access to for VA healthcare. If you are Native American, you may may have access to for Indian Health Service. These options exist, but you have to know about them and plan ahead.

Not accounting for inflation and rising costs in retirement

A retirement budget based on today's costs is too low. Inflation means your money buys less each year. Over 20 years of retirement, inflation can cut the purchasing power of your savings in half. A person who budgets $2,000 per month in today's dollars needs roughly $3,000 per month 15 years later if inflation averages 2 percent per year.

Social Security adjusts for inflation each year through cost-of-living adjustments (COLA). In years when inflation is high, your Social Security payment increases. In years when inflation is low, it may not. But other income — withdrawals from savings, pensions, part-time work — does not adjust automatically. If you plan to live on $2,000 per month from Social Security and $500 per month from savings, that $500 buys less each year. After 15 years, it might buy what $350 buys today.

The solution is to save more than you think you need and to plan for your money to last longer than you expect. If you think you will live to 85, plan for 90. If you think you need $2,000 per month, budget for $2,500. This sounds conservative, but it protects you against the most common retirement mistake: running out of money.

Frequently Asked Questions

Is it too late to save for retirement if I am 55 with almost no savings?

No. You can contribute up to $8,000 per year to an IRA (or $10,000 if you are 50 or older, using the catch-up contribution rule). If your employer offers a 401(k), you can contribute more. Ten years of $200 per month builds real money. Start now and you will have something; wait five more years and you will have much less.

What happens if I withdraw from my 401(k) to pay off debt?

You pay a 10 percent penalty plus income tax on the withdrawal. A $20,000 withdrawal costs $2,000 in penalty plus $2,400 to $4,800 in income tax, leaving you $12,800 to $15,600. You also lose decades of growth on that $20,000. If the debt is high-interest credit card debt, paying it off is important, but explore a 401(k) loan first — you repay it with interest that goes back into your account, with no penalty.

Can I change my Social Security claim after I have already claimed?

Yes, but only within limits. If you claimed within the last 12 months, you can withdraw your claim and reapply later at a higher age. After 12 months, you cannot withdraw. If you claimed too early and regret it, talk to Social Security about your options — they vary by situation.

Do I need to retire at 65 to get Medicare?

No. You can retire earlier and buy coverage through the ACA marketplace. You enroll in Medicare at 65 whether you are working or retired. If you are still working and covered by your employer's health plan, you can delay Medicare enrollment without penalty, but you must enroll within eight months of leaving your job or losing coverage.

What if I cannot afford to save anything right now?

Start with whatever you can — even $25 per month. Once your situation improves, increase it. If your employer offers a 401(k) match, contribute enough to get the full match, even if it is only 1 or 2 percent. That is information programs. If you cannot save now, focus on not withdrawing from retirement accounts you may have already built, and understand your Social Security options before you claim.