While we all make financial mistakes, it’s easier to bounce back and get back on plan while we’re young and trainable, but much harder as we get older. Typically, retirees do not have a nice regular paycheck coming in but have to carefully make the most of their retirement savings to meet monthly expenses. And, unlike say a 25- or 35-year old, folks in retirement do not have the luxury of time to make up for mistakes, hence their margin of error is much smaller than it is for younger workers.
So I want to forewarn you and keep you from making some of the worst mistakes I’ve seen people make in retirement. So let’s get started.
For most folks, retirement means a sudden drop in monthly spending power… because now – and for the rest of their lives – they’re fully dependent on their savings, social security, and a pension check if they’re lucky
1) Not Changing Your Lifestyle After Retirement
Retirement is often a time of significant financial change, in many cases from having a full-time paying job to having no regular pay check for the rest of your life. For most working class folks, this means a sudden drop in monthly spending power, because now—and for the rest of their lives—they’re fully dependent on their savings, social security, and perhaps a pension check, if they’re lucky.
But one of the biggest mistakes retirees make is not adjusting their expenses to their new budget-dependent life, a life where food, clothing, and entertainment expenses must be modified to be in proportion to their lower income level. Retirees must also account for healthcare and long-term-care costs. So talk to a trusted financial planner to make these budget and planning adjustments, so you can be prepared for any eventuality.
2) Failing to Move to More Conservative Investments
Once you have retired, you can’t afford large negative swings in your savings. You have to balance out portfolio growth with a reduced level of risk and think more short-term; you may not have the luxury of riding out long stretches of a down-market without withdrawing money or selling shares. Although you should still keep some money in aggressive growth investments, make sure you reduce your risk exposure and factor in worst-case scenarios, such as an extended bear market, and have a plan to get through any unexpected pitfalls. What I’m saying is don’t be overly optimistic or overly pessimistic, but plan well so you can ride out the worst, should that come to pass.
3) Applying for Social Security Too Early
I think most of my regular listeners are aware of this, because I have spoken often about the penalties associated with early withdrawal of social security. But to recap: Just because you are eligible to apply for Social Security at age 62 does not mean that you should. If you tap into Social Security at age 62, you’ll get about 25% less than what you would upon full retirement age of 66. You will also get 32% less than if you wait until age 70. So if you’re in reasonably good health, delay your application for retirement benefits until 66, for sure, and until age 70, if you can. Even if that means taking a part-time job well below your qualifications, I’d say it’s worth doing if it helps you meet expenses and allows you to put off Social Security withdrawals.
4) Spending Too Much Money Too Soon
When you retire and have saved and invested regularly, you may be in the fortunate position of having a pretty large nest egg, but make sure you don’t spend too much money too soon! Keep in mind that that money might have to see you through the next 25-35 years with rising medical expenses and any unexpected downturns in the market. So avoid the temptation to spend large chunks of that nest egg early in your retirement years.
5) Failure To Be Aware Of Frauds and Scams
It’s unfortunate, but retirees are among the most targeted groups for scams. So know that you are a target and beware of sweet-talking or over-promising fraudsters and scammers, and do your research well before laying out a large amount of cash on anything.
Even if you are nowhere near retirement, always keep a high level of skepticism when it comes to the investments being presented to you. Do your research first: Ask about it, check multiple trusted references and reviews, talk to your friends and your financial advisor, go online and educate yourself… and even then, don’t bet the ranch!
6) Cashing Out Your Pension Too Soon
Many times, employers will give you the option of cashing out your retirement as a lump sum, which can be appealing to some retirees who are lured by the prospect of managing their own money and having total control over their assets. This is not always a good move, because managing money takes experience and skill, and a negative outcome could be devastating.
Sometimes it’s better to have the professionals who are managing your pension pay you a fixed amount each month, which relieves you of the stress of doing your own investing.
In addition, be mindful that cashing out a pension early often comes at a big cost. Be wary and weigh your options well. Remember, this money will have to last for the rest of your life.
7) Not Being Effectively Tax-Wise During Retirement
While it’s nice to have multiple retirement accounts, remember that each retirement account may be taxed differently. I don’t want to go into detail here because every scenario is different, but speak to your financial advisor about the most cost-efficient way of being taxed during retirement.
8) Supporting Adult Working Children
This is especially true today with millennials putting off purchasing homes and starting families and instead staying with their parents longer. It’s often hard to tell your child that he or she can’t live at home anymore or saying no to helping with tuition or a mortgage down-payment. But if you have limited resources, avoid giving large monetary gifts or loans, especially if you are already out of the work force. Remember, you will no longer be earning the same as you did when you had a job. So whatever money you have should be focused on covering your personal expenses only and then saving and investing whatever is left over – not doling it out, however well intentioned.
9) Being House-Rich but Cash-Poor
Many of us pay our mortgages for most of our lives and end up with a lot of home equity when we retire, but with little cash left. While houses appreciate in value over time, the costs of upkeep including taxes, utilities, services, repairs, and maintenance, can add up to more than your budget. So consider downsizing your living expenses by selling your house and moving to a smaller, more affordable home. You can also invest the gains from a home sale to buttress your retirement savings.
10) Not Staying Active Socially and Physically
Finally… one of the worst things in retirement is becoming reclusive and inactive. It’s important to maintain social connections and to enjoy the company of friends and family or to join social groups and activities that enable interaction with peers. The mind is like a muscle—if it is not exercised, its capabilities will fade. So in addition to exercising their bodies regularly, seniors should also exercise their brains. Reading books, solving puzzles, and just simply engaging in conversation are all great ways to keep the brain sharp and functioning well into later life. At all costs, avoid becoming reclusive or spending a lot of time in front of the television. Staying active will keep you mentally sharp and physically healthy, will elevate your mood, and help you be happy well into your golden years!