social security benefits

6 Costly Retirement Mistakes to Avoid

old woman on the bench - retirement mistakes to avoid

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.

city view - living in expensive area in retirement

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:

Mortgage
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.

Article from Retire Guide: Health Savings Account (HSA)

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.

Article by Danielle K. Roberts: Healthcare Costs in Retirement – Avoid These Big Mistakes

Mistake #6 – you spend retirement money fast.

kitchen remodeled - costly retirement mistakes

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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Top 7 Financial Mistakes to Avoid in Retirement

by Maggie 2 Comments

winter-a woman-financial mistakes in retirement

Most of us looking forward to retirement. We imagine doing lots of things we have not had enough time to do while still working. My dreams about retirement are all about traveling the world and spending more time with the family.

But dreaming about happy retirement is not enough. To have a pleasant and secure retirement depends on how well we prepare for it. Also, it depends on how few financial retirement mistakes we make before start living the life of our dreams.

Preparing for retirement could be complicated. You have to understand your life expectancy, when is the best time to collect Social Security, when and how to withdraw money, and how to pay for big expenses such as long-term care.

Many people prefer to wing it and go to retirement without any kind of planning. They think that if you have a Social Security paycheck and a little savings everything will be fine. Unfortunately, this kind of conclusion might be a costly mistake.

Several financial mistakes can harm your financial security in retirement. But you can avoid it by planning so you can retire with confidence.

Here are the top 7 financial mistakes to avoid in retirement.

1. Mismanaging when to start collecting Social Security benefits.

railway - road to retirement-financial mistakes

When you’re planning for retirement one of the most important decision is when to start claiming Social Security benefits. This decision is personal and depends on your life expectancy and how much you need the money.

In general, waiting until your full retirement age or even 70, is the smart move. Social Security paycheck is a guaranteed income and it will keep coming in as long as you live.

Many people have their financial plan based on the assumption that they will work well into their 70’s and receive continuous income. But the reality can be somewhat different.

According to statistics about half of the retirees stopped working before they thought they would because they lost their jobs, couldn’t find a new one, tired of old jobs, or have health issues. Early retirement before you can afford it can be damaging for your financial security. When you retire too early you might face a risk of running out of money or have to go back to work.

Avoid this mistake and don’t just start collecting your Social Security at any time. Learn more about it first so you can maximize your paycheck for life. You can increase or decrease your benefits. If you start collecting the benefits early at age 62, the paycheck will be reduced to up to 30 percent.

The full benefits will be paid at your full retirement age which is 66 or 67 for most of us these days. But If you can delay collecting benefits until age 70, your monthly payments will be increased by 8 percent for each year between full retirement age and 70. Waiting until age 70 is a great benefit because you’ll receive the highest Social Security paycheck for the rest of your life.

If you’re married, the smart move would be to coordinate your time of claiming benefits as a couple. The spouse with the lower expected benefits can collect early. The other spouse can delay collecting the benefits allowing the future paycheck to grow bigger.

When one spouse dies, one of the couple’s Social Security paychecks will go away. That is why it’s important to have a higher earner to delay claiming Social Security as long as possible. So, the survivor will have to get by on the larger of two checks.

Remember to find out what you can expect from Social Security and incorporate it into your retirement plans.

2. Underestimating how long your retirement will be.

coffee pot-flowers-happiness in retirement

People are living longer and longer. For many of us, it would be desirable to retire as early as we can. But then it could be dangerous for our finances if we end up living an exceptionally long life. There is a big chance of running out of money in our late years.

According to the Social Security Administration, “About one out of every four 65-year-olds today will live past age 90, and one out of ten will live past age 95.” If you retire at age 62 and live to 90, you’re looking at 28 years of retirement. You need to have enough retirement money to support you for that long.

If you’re fortunate to spend many years in retirement your nest egg should survive withdrawals over a long time. To avoid running out of the money you need to plan well. Look at your retirement accounts and estimate if you have saved enough money to retire. If not, save more, work longer, and/or delay your retirement.

3. Withdrawing from retirement funds when the market is down.

euro coins and banknotes-house- retirement portfolio

The recent years market crashes and recessions wiped out millions of people’s retirement savings. The 2008 financial crisis sent everyone’s investments down significantly. Though, the market has recovered since then many people lost their money if they sold everything at the bottom of the market.

The 2020 market crash due to coronavirus pandemic affected millions of baby boomer’s investment portfolios. And probably many of us will never recover from these losses. The recent market crash changed many baby boomer’s retirement plans. If you were planning to retire this year or even next year, you may need to change this decision and give your portfolio extra time to recover.

There is a lot of uncertainty and terrifying news in the world today. It could be very stressful if you’re getting closer to retirement.

However, the best thing you can do is to stay calm and don’t panic. You’ll only lock in losses if you start selling your stocks and withdraw money from retirement accounts when the market is down. It may be nerve-wracking to see money evaporating from your retirement portfolio.

But don’t make any rash decisions and sell your assets, because you’ll regret it later. Remember that these bad times shall pass, the stock market will recover, and you’ll be in a strong position to retire once it does.

You can avoid the risk of pulling money out of retirement accounts during the market downturn by having multiple sources of income to draw from. Plan on having assets that are not dependent on market fluctuation such as cash reserves, emergency funds, annuity. The more options you have the better you’ll be positioned to minimize the impact of market losses.

4. Maintaining the same level of investment risk in retirement portfolio.

When you were younger you had no problem investing in risky investments because you had time to recover losses. But when you get closer to retirement you don’t want to gamble your savings. If the market goes down, you will have little time to rebuild them.

You cannot predict the market and eliminate the risk of losing money entirely. But you can take steps to help decrease your exposure to risk by adjusting and diversifying your portfolio. To avoid having to sell stocks at loss you can adjust your asset allocation before you start spending your retirement savings.

When you get closer to retirement, you should re-evaluate your investment strategy. For many years you’ve saved and invested money with one goal in mind is to grow your assets. Now, as you’re about to retire, you have to focus on another goal – make sure your assets will last.

Take time to re-evaluate your overall investment strategy and decide what is the best way to invest your money. With age, we think about preserving capital rather than making big profits in the stock market. It’s recommended to have a 60/40 portfolio for people who are close to retirement. The invested money should provide income and growth of your portfolio during retirement years.

Many people make a mistake of getting too conservative by investing more than 50 percent of their portfolio in bonds. Bonds are good for preserving the capital, but they don’t give enough growth to beat inflation. That’s why you still need to have money invested in stocks/ mutual funds so it will grow over time.

Your portfolio should be balanced for your age and risk tolerance between individual stocks, mutual funds, bonds, and cash. If your portfolio not properly diversified and concentrated mostly on stocks, that kind of risk factor could hurt you in the future.

Some retirees go too conservative with their investment portfolios and invest everything in CDs and other cash-like investments. This is one of the biggest mistakes because inflation erodes the purchasing power of the dollar. To avoid this mistake add stocks (equities) to your portfolio to provide growth potential. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

5. Draining retirement savings and not tracking your spending.

books-sunglasses-beach-spending plan in retirement

When you stop working it can be easy to get carried away and start spending money on travels, hobbies, grand kids, or anything else you were dreaming about. It’s important to have a budget in retirement. With no plan for tracking your spending, you can drain your retirement savings fast. It will be easy to have budgeted $4,000 a month but to realize you’re spending $6,000 a month.

Your living expenses will change after you stop working. You will spend less on eating out, lunches, business clothes, commute, etc. But you will spend more money on new hobbies, activities, and travels. You might decide to buy a vacation home, a new car, a boat, or spend money on remodeling your home.

Some new retirees celebrate their new life in retirement by going on a spending spree. If you’re a new retiree, you need to know exactly how much money you have to live on.

Your goal should be to have a spending plan that includes the cost of “need to have” and “want to have” expenses. Once you calculated your essential or “need to have” expenses, make sure it can be covered by guaranteed income from Social Security, a pension, or an annuity. Then you can see how much money you can spend on your bucket list.

Having a monthly budget and tracking your spending helps to make sure your money will last.

6. Carrying debt into retirement.

street-lights-debt-financial mistakes in retirement

Avoid this big mistake by carrying debt into retirement because it could increase your chances of running out of money fast. When you start living on a fixed income it’s hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

If you have plenty of income sources having debt may not be a big deal for you. Otherwise, plan to pay off debt before you retire so you’ll sleep better at night knowing you’ll have the freedom to spend money on yourself.

7. Underestimating healthcare expenses and long-term care cost.

hospital-scanning equipment-healthcare expenses in retirement

We all know that health care is very costly, but many of us forget to include it in our retirement planning. Underestimating health care expenses or how to pay for long-term care can be a big mistake. Yes, Medicare provides health insurance, but it doesn’t pay for all medical bills and it doesn’t pay for long-term care at all.

There is no way to know how much it will cost. But according to Fidelity Investments, a healthy couple can expect to spend on average, a total of $275,000 out of pocket on healthcare expenses in retirement. And long-term care cost is not included in this number. A sudden medical emergency or serious illness can wipe out your retirement savings.

To avoid this financial mistake plan for medical expenses and be smart about Medicare by choosing the plan that will serve you best. Make the most of all the Medicare program offers and be good about all required screenings and preventive care. Don’t forget to visit your doctor and get regular check-ups, so that if any problems get caught early you can do something about them.

Think about how to reorganize your life so you can stay healthy. What you eat and how often you exercise will impact who you are in 20 years. You might reduce your overall healthcare costs by staying healthy.

Long-term care insurance might be a solution for many future retirees. There is a big chance for many of us that one day we will need help with daily living tasks like dressing, bathing, cooking, or even eating. Not everyone can rely on family or friends for long-term care help.

Retire Guide: Health Savings Account (HSA)

Health Savings Account (HSA) can help to save more money. Also, you can set up a separate bank savings account or put money in a certificate of deposit (CDs) for future medical expenses.

Putting It All Together

The financial mistakes can increase your chances of running out of money in retirement. These mistakes can ruin even the most carefully planned retirement. If you dedicate a little bit of your time learning about retirement and planning for smart moves, you can end up with tens of thousands of dollars more than you’ve expected. That can make a huge difference when you retire and start living on a fixed income.

What do you think are the big financial mistakes in retirement? Have you made some yourself? Please share your thoughts and ideas with us in the comments below.

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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.