How often do you check to see if you are on track to retirement? I know this can feel like an overwhelming task. But if you are in your 50s or 60s checking on your readiness for retirement is a must.
Retirement is a major life event. When you finally retire you need time to process and adjust to your new life. You want to make sure you are making smart decisions about your future. Many new retirees do not know how to control their spending. They got excited about retirement and dream about new ways to spend their saved money.
Some people will spend money on a beautiful vacation house or remodeling the current one. Others will buy a luxury car or a boat. Many like me who will spend money on traveling the world.
But it is important to remember that once we retire, we have to live on the fixed income. And spending money fast will put us on a dangerous path to a financial disaster when we are old and cannot work anymore.
Here is the list of 6 costly retirement mistakes to avoid.
I have included some tips on what to do when you are facing any of these challenges.
Mistake #1 – you live in an expensive area.
Housing is expensive. Everybody knows that living in a big house is costly. It takes a big chunk of your income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage.
Generally, you want to spend no more than 30 percent of your monthly income on housing. But if you live in an expensive neighborhood it may take between 35 to 50 percent of your income to pay for it.
Most of us hope that we will spend less money in retirement. While we will save money on business clothes, commuting expenses, and takeout lunches, we will still have to pay for housing expenses.
When you retire, housing will be your biggest expense. It may eat up a good chunk of your retirement income. You need to make sure that you can afford it while living on a fixed income.
What to do:
To avoid this costly retirement mistake you need to downsize or move to a more affordable area. I am sure the home where you live now is a perfect size and location. I know that you love it and have a lot of great memories of raising your family there.
But if it is in a high cost of living neighborhood and expensive to maintain you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.
Mistake #2 – you have too much debt.
Retiring with too much debt is a way to deplete your retirement savings fast. If you do not plan for reducing it now, you will face the challenge of not having enough money to pay for your retirement expenses.
Paying off the debt on a fixed retirement income can be a big burden. It will be difficult to live comfortably if you have to pay large debt balances. There are several sources of debt we tend to accumulate during our lives:
- Credit card
- Student loan
- Car loan
- Home renovations loan
- Medical expenses
It is not a secret that baby boomers generation has more debt than previous generations. According to Experian data for the fourth quarter of 2018, people between the ages of 55 and 73 carry an average total debt of $95,095.
If you want to enjoy a debt-free retirement, you need to reduce or pay off as much of your debt as possible.
What can you do:
The best approach to deal with debt is to start with small steps. You need to develop a plan on how to pay off your debt and then stick to it.
Over the years Roman and I had accumulated $95,000 in student loans, $120,000 in home renovation loans, and $5,400 in the medical loan. It took us many years to pay them off. In the beginning, we did not create a plan of paying off debt fast. Then, we got serious, created a plan, and diligently followed it for several years. I am happy to say that we finished paying off the home renovation and student loans by the end of 2019.
I have to admit that being a personal finance blogger help me to speed up the process of paying off our debt. Our next plan is to pay off the mortgage before we retire. Paying off debt was an important decision because it helped us to increase our retirement savings.
Mistake #3 – you did not prepare your retirement budget.
When you dream about retirement while still working you might miscalculate the cost of your retirement. Accurately predicting the future can be challenging. However, preparing a retirement budget in advance will help to see your financial situation. Also, it will help to see if you can afford the retirement of your dream and figure out when you are ready to retire.
You need to take time and create a retirement budget that compares your spending to your combined income. Also, it needs to be done before you retire so you know if you can afford it.
First, you need to know how much you will be receiving from Social Security, pension (if you are the lucky one), your savings, and part-time work. Next, you need to estimate your future expenses and compare it with your retirement income. Once you compare it, you will get an idea of how long you can sustain the retirement of your dreams.
Retiring without a budget is a mistake and can cost you greatly. Perhaps you are the lucky one who has enough money to retire in your home, maintain your current lifestyle, and pay for wonderful trips, vacations, and hobbies. But most of the future retirees will need to adjust to make their money last. Some of these adjustments might involve:
- Downsizing and moving to a more affordable community.
- Relocating to a different state with a low cost of living.
- Delaying retirement and working longer.
- Working a part-time job in retirement.
How to avoid this retirement mistake:
I talked about how to prepare a retirement budget in the post below. It should give you a clear step-by-step guide on how to do it.
Mistake #4 – you started to claim Social Security benefits too early.
Social Security paycheck is a guaranteed retirement income. The best part of Social Security that it will keep coming in as long as you live. The smart way is to make your Social Security paycheck as large as possible because it might be the only guaranteed lifetime income you will receive.
You can start taking your Social Security benefits at 62. But you will not be receiving the full payment. It will be reduced to up to 30 percent and this reduction will be permanent.
We all know that life is full of surprises. Sometimes people have no choice but have to start claiming Social Security early. If you lost your job and have no money or get ill and cannot work, you might need that paycheck to survive. But if you can afford not to take it, you will be better off in the long run.
What can you do:
If you have not started your Social Security, the smart way is to wait to claim your benefits. Waiting until a full retirement age which is 66 or 67 for many of us will help to have access to 100 percent of your benefits.
If you can afford to delay it even longer until you turn 70, will help to get the highest Social Security paycheck for the rest of your life. When you’re in your 80s or 90s, the monthly difference in your income from delaying might bring a big difference between living in poverty or comfort.
Mistake #5 – you did not save money for medical expenses and long-term care costs.
Many baby boomers who are close to retirement still believe in free Medicare. I assume people do not do enough research to understand that Medicare does not cover all your medical expenses. Therefore, being hit by a major medical bill while living on a fixed income can be damaging to your retirement funds.
It is important to remember that healthcare is the second biggest expense in retirement after housing and you need to plan for it.
The healthcare cost is rising. According to recent data from Fidelity, the average out of pocket healthcare cost for a 65-year-old couple will be close to $285,000 instead of $265,000 as it was two years ago. And that number does not even include long-term care costs.
What can you do:
There are several ways to avoid this costly retirement mistakes. First, you need to plan for it and save more money. You can set up a health savings account (HSA) and start contributing money regularly. It is a tax-deductible account which helps to reduce your taxable income. With withdrawals from HSA, you can pay for qualified medical expenses, including dental and vision.
Next, you need to decide how to pay for long-term care if you or your partner need it. Long-term care insurance is the most recommended way of planning for future expenses. It will help you not to be a financial burden on your family if that time comes.
Then, think about how to take care of your health so you can live a long and healthy life in retirement. What you eat today and how often you exercise will impact who you are in 10 or 20 years. Being active and eating right can add more years to your life and save money on future medical bills.
Lastly, do not forget to get regular check-ups, screenings and to visit your doctor, so that if any problems get caught early you can do something about them.
Mistake #6 – you spend retirement money fast.
Many new retirees tend to spend their retirement savings fast. They get excited about newfound freedom and having a good chunk of money saved for their next phase of life. Then they think about big remodeling projects or even buying a vacation house on a lake and a new boat.
Many new retirees take up new hobbies and activities to fill up their new free found time which can add up a lot of extra expenses to their retirement budget. Also, you might want to travel more and like to spend money on long-term travel or family vacation trips. And the list of new things you want to do is long.
According to data, more than 20 percent of retirees spend more on leisure than they thought they would. Finding new ways to spend your retirement money can be a costly mistake if you do not know how to control your spending.
What to do:
Stick with your retirement budget and control your spending. You do not want quickly to blow through your savings like there is no tomorrow. You still want to have fun in retirement, but you have to be careful with overspending. The bucket strategy will help you to stick to your budget and provide income for those fun years.
You have to figure out how much to withdraw from your retirement savings. Deciding how much to withdraw can be confusing. You do not want to withdraw too much too soon because it is going to leave you financially broke in your late years. On another hand, you do not want to withdraw too little and then struggle financially.
How much should you withdraw from retirement accounts?
As a new retiree, you need to make your own assessment of how much is safe to withdraw from your retirement funds. The financial experts recommend following the 4 percent rule. The 4 percent rule is a rule of thumb for retirement spending. It will allow you to withdraw 4 percent of your portfolio each year for a comfortable retirement.
Putting It All Together
Many things that can go wrong in your retirement. Besides, some things that can happen beyond your control such as health issues. But there are costly mistakes we need to avoid because they can ruin even the most carefully planned retirement.
Have you thought about retirement mistakes? How are you planning to avoid them? Share your thoughts with us in the comments below.
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