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.
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.
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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.
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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.
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.
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3. Withdrawing from retirement funds when the market is down.
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.
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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.
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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.
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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.
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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.
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5. Draining retirement savings and not tracking your spending.
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.
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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.
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6. Carrying debt into 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.
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7. Underestimating healthcare expenses and long-term care cost.
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.
Great article. I wanted to add to the list that careful planning is required when deciding where to live. It costs a lot to move to another place or state and if you don’t plan wisely it can turn out badly. We have several friends who left a nice town, relocated to a better community and then end up bouncing around from place to place and never being happy.
Yes, relocating costs money. Even moving from your home to a rental apartment could be expensive. Thank you for sharing your thoughts!