4 Costly Mistakes to Avoid in the Final Year Before Retirement

The final year before retirement can be more financially important than many of the years that came before it. Once the paycheck stops, opportunities to maximize workplace contributions disappear, health insurance may change abruptly, and a retiree may lose the flexibility that comes with having both earned income and a full year to plan around it. That makes the last 12 months a critical transition period rather than simply a countdown to the final day of work.

Many retirement mistakes happen because people focus almost entirely on whether they have accumulated enough money. The harder questions involve what to do with that money before retirement begins, how to manage taxes during the transition, and how much liquidity should be available when markets or health-care costs do not cooperate. Four mistakes deserve particular attention because each can have consequences that last well beyond the retirement date.

1. Stopping Retirement Contributions Too Early

The year before retirement is often one of a worker’s highest-earning years, which can make it an especially valuable time to continue contributing to a workplace retirement plan. Yet some workers begin mentally checking out before they officially retire and reduce contributions because they assume the saving phase is essentially over. Doing so can mean giving up employer matching dollars, tax benefits, and one final opportunity to move a meaningful amount of income into retirement accounts.

For 2026, the regular employee deferral limit for most 401(k), 403(b), and governmental 457 plans is $24,500. Workers who are 50 or older generally can contribute an additional $8,000, while those who turn 60, 61, 62, or 63 during the year can make an enhanced catch-up contribution of $11,250. That brings the potential employee deferral for someone in that 60-to-63 window to $35,750, assuming the employer plan permits the catch-up.

There is another 2026 wrinkle for higher earners. If a plan offers Roth contributions and the worker’s prior-year wages from that employer exceeded $150,000, SECURE 2.0 generally requires applicable catch-up contributions to be made on a Roth basis rather than pre-tax. That makes the final contribution strategy more complicated because workers need to consider both how much they can contribute and which tax treatment makes sense before the opportunity disappears.

2. Missing a Valuable Lower-Income Tax Year

Retiring in the middle of a calendar year can create an unusual tax-planning opportunity because wages may fall sharply once employment ends. There is no special “midyear retirement tax break,” but the household may finish the year with significantly less taxable income than during a normal working year. That can create room for Roth conversions, realizing capital gains, or other moves that would have been more expensive while the retiree was earning a full-year salary.

Consider someone who earns $75,000 during the first half of the year and retires in June. If no major income sources replace the salary immediately, that person may finish the year in a lower marginal tax bracket than in previous years. A Roth conversion completed before Dec. 31 could deliberately use some of that unused bracket space, potentially reducing the size of future required minimum distributions.

The opportunity needs to be coordinated carefully because adding income can affect more than federal tax brackets. Capital gains, Marketplace health-insurance subsidies, and future Medicare premiums can all be sensitive to income levels. The objective is not to create as much taxable income as possible, but to make intentional use of a temporarily lower-income year rather than allowing it to pass by accident.

3. Underestimating the Health-Insurance Gap

Health insurance can become one of the largest surprises for someone retiring before 65. Medicare generally does not begin until 65, so an early retiree may need to bridge several years with COBRA, an Affordable Care Act Marketplace plan, coverage through a spouse, or another private option. That cost should be built into the retirement plan before the final paycheck rather than discovered afterward.

COBRA is attractive because it allows someone to temporarily keep the same employer-sponsored coverage, but it can be expensive. The worker is typically responsible for the full premium rather than only the employee share, and the plan can charge up to 102% of the total cost of coverage. That means a health plan that felt inexpensive while the employer was heavily subsidizing it can suddenly become one of the household’s largest monthly bills.

Marketplace coverage can provide another option, but subsidies are tied to household income. Under the current 2026 rules, the Premium Tax Credit generally applies to eligible households with income from 100% through 400% of the federal poverty level, subject to other requirements, and the size of the credit changes with income. A poorly timed Roth conversion or large capital gain can therefore increase both the tax bill and the cost of health insurance.

That is why health coverage and tax planning should be handled together. Someone retiring at 62 should know not only what insurance will replace the employer plan, but also how withdrawals, conversions, and investment sales could affect the price of that coverage for the next several years.

4. Entering Retirement Without Enough Cash

Retirement creates a new problem that workers often did not have to think about during their careers: the portfolio may have to produce the paycheck. If the market falls shortly after retirement and there is little cash available, the retiree may be forced to sell investments while they are down simply to cover living expenses. That can magnify sequence-of-returns risk at exactly the wrong time.

A cash reserve can provide breathing room. Some retirees may be comfortable keeping roughly 12 months of planned spending outside long-term investments, while others may prefer 18 or 24 months depending on job flexibility, pensions, Social Security, and risk tolerance. There is no universally correct amount, but the purpose is to avoid becoming a forced seller every time markets decline.

Liquidity can also improve tax flexibility. If a retiree can pay expenses from cash temporarily, there may be less pressure to take large traditional IRA distributions or realize gains in a year when doing so would increase taxes or reduce health-insurance subsidies. That turns the reserve into more than an emergency fund because it gives the retiree greater control over when taxable income appears.

The danger is going too far in the other direction. Holding several years of expenses in cash can reduce long-term growth and expose more of the portfolio to inflation. The goal is not to hoard cash, but to create enough near-term flexibility that the rest of the investment strategy can remain intact during a difficult market.

The Final Year Should Be Planned Deliberately

The year before retirement is a transition between two very different financial systems. While working, income arrives automatically, health insurance is often subsidized by an employer, and retirement contributions are built into payroll. After retirement, the household suddenly has to decide where income will come from, how taxes will be managed, and which expenses must now be funded independently.

That makes waiting until the retirement party to start planning unnecessarily risky. Contributions may need to be adjusted months earlier, health coverage should be priced before leaving work, and cash reserves may need time to build without forcing a large investment sale. Tax projections should also be completed before the calendar year ends so opportunities do not disappear simply because no one noticed them.

The most effective retirement transitions usually begin at least a year before the last day of work. That gives the household time to maximize final contributions, identify lower-income tax opportunities, secure health coverage, and create enough liquidity to avoid making rushed decisions after the paycheck stops. A retirement plan should not begin on the first day of retirement; by then, some of the best planning opportunities may already be gone.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

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