8 Costly Mistakes Retirees Make When Stocks Soar - And How To Protect Your Savings

It's easy to get wrapped up in a surging stock market when you're at retirement age. All of those investments are shooting through the roof, and your accounts are larger than ever. 

However, there are plenty of mistakes retirees make when the market is firmly in bull territory. These can range from minor to costly and can totally tank your retirement plan.

Here are eight costly mistakes retirees make during bull markets and how to avoid them and protect your savings.

Assuming the bull market will keep climbing

When everything keeps going up, your confidence keeps building and building. So, you assume that things will keep climbing, and you're tempted to double down on your positions. That recency bias can do a number on your portfolio once the inevitable downturn happens. 

Confidence in the market tends to peak when prices do. If everyone is overwhelmingly positive about the market, that's a signal that the top is in, or close to it.

Letting your asset allocation drift past its target

Say you retired with a 60/40 portfolio split, meaning 60% stocks and 40% bonds, and you felt good about that mix. Then stocks rip higher for two or three years while bonds plod along, and without you touching a single thing, that 60/40 quietly becomes 75/25 — or even higher.

Your portfolio is now far riskier than the one you actually signed up for, and you never chose to make it that way. Drift is sneaky precisely because it requires no action, and doing nothing feels safe. But when the next downturn hits, that bloated stock position falls harder, and the cushion you were counting on turns out to be a lot thinner than you thought.

Triggering capital gains taxes when you rebalance a taxable account

So you finally decide to rebalance and trim some of your holdings. If you do that, selling inside a regular taxable brokerage account, you can hand yourself a tax bill you never saw coming. 

How long you've held the investment matters enormously. Sell something you've owned for a year or less, and the gain is taxed as ordinary income, at the same high rate your paycheck used to be. Hold it longer than a year, and you usually qualify for the lower long-term capital gains rate instead. 

Your rebalancing can also significantly affect your taxable income and, in turn, your tax bracket. This is something many seniors miss when changing their asset allocation. Take this into account when rebalancing your portfolio.

Increasing your retirement withdrawal rate as the balance grows

As your overall portfolio balance grows, it can be tempting to increase your withdrawal rate and go on a spending spree. The problem is that a high balance during a bull market is partly an illusion. A chunk of it is paper gains, and paper gains can evaporate.

If you ratchet your withdrawals up to match the peak, you've locked in a higher spending rate right before a possible drop, and dialing back later is brutal once you've gotten used to the lifestyle. A balance that's up 25% does not mean you can safely spend 25% more. Your spending plan should track what holds up over decades, not what your statement says this quarter.

Ignoring sequence-of-returns risk in early retirement



This is the one most people have never heard of, and it might be the most important on the list. Two retirees can earn the same average return over 30 years and still end up in completely different places, purely because of the order those returns showed up in. This is known as a sequence-of-returns risk.

The danger is that the timing of your returns, not just the average, can make or break a portfolio you're drawing down, because a market drop in the first few years of retirement does far more lasting harm than the same drop later on. This is a crucial factor to consider when you begin to draw down your retirement accounts.

Letting your cash cushion run down when stocks are high



Keeping cash in your accounts is a good practice, no matter what the state of the market. However, it's even more important when stocks are surging, and you're tempted to put more money in the market.

The whole point of keeping a cash reserve was so that when the market drops, you have money to live on without being forced to sell investments at the worst possible moment. A retiree with two years of expenses in cash can simply wait out a bad stretch and let the portfolio recover. A retiree with nothing has to sell at a loss to pay the bills, which is precisely the move that turns a temporary dip into permanent damage.

Mistaking a bull market for investing skill



Unless you were a stockbroker or hedge fund manager in another life, it's unlikely you're an amazing investor. The hard truth is that in a strong bull market, almost everything goes up, and it's nearly impossible to tell luck and skill apart.

The risk is that the confidence pushes you to take bigger swings, concentrate harder, and tune out advice you'd normally take seriously. Some of the worst financial decisions are made by people who feel they're the smartest. If your portfolio is up, give the market its due before you start handing yourself the credit.

Waiting too long to reduce stock exposure



While you were still working and saving, an aggressive, stock-heavy portfolio made all the sense in the world. Retirement flips that on its head. Now you're spending the money instead of adding to it, and a big loss doesn't have decades to heal.

Once those dollars are gone due to a market crash and you're drawing the account down to live, there's no recovery runway left. You can't earn it back with a salary you no longer have. 

A long rally is exactly when people promise themselves they'll cut risk later, and then never do. This is an irreversible mistake that will greatly reduce your overall retirement portfolio. Take winnings during a big bull run and cash them out.

Bottom line

In a long bull market, the biggest threat to your retirement usually isn't the market itself: It's you, and the financial mistakes a good run tempts you into.

And there's data to support it. Research shows that over the past decade, the average fund investor earned about 1.2 percentage points less per year than the funds they held, roughly 15% of those funds' total return, mostly because of poorly timed buying and selling. That shortfall is the price of reacting to the market rather than sticking to a plan, and it quietly compounds for years.

That means you're better off keeping things boring and simple. When you rebalance, do it inside your tax-advantaged accounts first, where trading stock for bonds triggers no capital gains tax. Keep at least two years of expenses in cash, so a downturn is something you can wait out instead of something that forces your hand.

And no matter how good the statement looks after a strong year, leave your withdrawal strategy where it is, because a bigger balance is not the same thing as a safer one. That way, you can ensure you won't run out of money in retirement.