How does one avoid making retirement financial mistakes? Stick with Frugal Americans, and you’ll find out!
The last couple of years have been an emotional rollercoaster for many people, and you may feel constantly uncertain or stressed about your finances. You’re probably asking yourself, “Am I making any retirement financial mistakes in my golden years?”
If you’re worried, you’re not alone. But stressing out won’t fix the problem. No one wants to work until they drop…and they shouldn’t have to.
About 80% of financial planning involves boosting your savings, maximizing your earnings, and budgeting now to have the life you love later.
And having a fulfilling, healthy retirement is well within your reach … as long as you avoid a few common retirement financial mistakes. On that note, we’ve compiled a list of the 12 biggest retirement planning blunders and how to avoid making them.
Do any of the following sound familiar?…
Retirement financial mistake: You don’t know what you’re spending money on monthly
According to a recent study by US Bank, only 41% of Americans stay on a budget. This can be a big retirement financial mistake, especially at the beginning of your retirement.
When you’re working, it’s okay to get by month to month and do some mental accounting to ensure that accounts aren’t overdrawn and bills are paid. But, to secure your retirement, you must know how much money you want to spend monthly for the rest of your life.
You can do an infinitely better job with a retirement budget if you know exactly what you typically spend money on. Likewise, it’s almost guaranteed that you’ll find some good opportunities to cut costs. The little things always add up.
For instance, some estimates suggest that an average household wastes anywhere from $1,350 to $2,275 yearly on groceries. You may also find that you’re paying too much in errors on your credit card bills, hidden fees, and unused subscriptions. That’s an easy fix.
Simply take an hour this week, write down everything you have spent in the past month, and categorize your spending. Do this for a couple of months in a row. And use this knowledge to make a better retirement plan, including a detailed budget with the future in mind.
Retirement financial mistake: Relocating on a whim
The appeal of warmer climates has long been the siren call of many folks approaching retirement.
So, if you’re planning on heading south to Florida or one of the many other fantastic places to retire if you hate the cold, here’s our advice: test the waters before you make any permanent decisions.
Too many people have shuffled off willy-nilly to what they thought was a dream destination, only to find that it’s more of a nightmare. You could realize that everyone’s a stranger, the pace of life is too slow, and endless rounds of golf and leisurely strolls on the beach grow boring.
Well before your retirement date, you can go on an extended vacation in your chosen destination to get a feel for the lifestyle and people.
This is especially true if you’re contemplating retiring overseas, where new laws, languages, and customs can overwhelm even the most adventurous retirees. Once you do take the plunge, consider renting before buying.
Another good idea to avoid this retirement financial mistake would be to transform yourself into a “halfback retiree.” They’re individuals who head to the Deep South, don’t like it, and move halfway back toward their former home up north.
Retirement financial mistake: Having too much money in your 401(k)
People usually don’t realize that there’s more than one type of retirement account. And a 401(K) isn’t the most tax-efficient. It’s subject to higher taxes after you retire, and you have less control over how your money is invested.
You’ll also be penalized if you withdraw your money early. Generally, 401(k) contributions are pre-tax dollars. So, the money is taxed when you pull it out to pay for retirement. Nowadays, that rate is 20%.
On the other hand, the money you contribute to an IRA is money you’ve already paid taxes on, so you can withdraw it tax-free at any time. So, how much is too much for your 401(k)?
The percentage of your retirement that should be in your 401(K) vs. your IRA or other account varies based on your age, tax bracket, employment status, salary, and other personal factors. A CFP can help you figure all this out.
You should certainly have a 401(k) if your employer offers it because it guarantees certain protections. But some of the funds should be put into other retirement accounts, like a Roth IRA.
The bottom line is that you should figure out what’s best for you: If you prefer to pay the taxes later and let the interest rise in your favor, keep more of the money in the 401(k).
But if you feel like you might need to withdraw your money early, save more in the IRA. We’ve tried simplifying it, but a good CFP can help you estimate your retirement tax bill.
Retirement financial mistake: Ignoring the financial markets
The markets might be down, and economic factors may seem gloomy. But all-time highs weren’t that long ago. So, even though the only thing we know for certain is that the financial markets are inconsistent, we can be reasonably sure that the long-term outlook is promising.
So don’t make the retirement financial mistake of dismissing the market. You should set up an investment strategy, preferably a diversified portfolio, and then leave it alone except for once every quarter when you’ll need to rebalance to keep up your asset allocation strategy.
Experts say to set your plan and stick to it. Not sure where to begin? A financial advisor can help you out. Set up a discovery session with an advisor to work on how to meet your financial goals.
Just remember that whatever you do, selling your holdings in a down market is probably a bad idea. And don’t forget that losses are not losses unless you sell. If you can hang in there and keep your investments, the odds are high that you’ll bounce back.
Retirement financial mistake: Not having an investment policy statement
You’ll likely do best with a defined strategy regarding your retirement investments.
An Investment Policy Statement is a document that describes your investment goals, strategies for achieving those goals, a framework for making any modifications to your plan, and options for what to do if things go awry. A good IPS should ensure better financial results.
It also comes in handy when you experience a significant life transition or change. It’s really about understanding what does and doesn’t work for you.
And so, if you can filter out all the wrong things and those that don’t fit within your investment plan, hopefully, you can avoid some retirement financial mistakes and you’ll be left with what will work best for you and what you can stick with to avoid pitfalls.
Retirement financial mistake: Falling for too-good-to-be-true offers
Careful planning, hard work, and years worth of wealth-building are the key to financial security in retirement. There really aren’t any shortcuts.
But, according to the FTC, many people lose hundreds of millions of dollars annually to “get-rich-quick” and many other scams, as elder fraud is at an all-time high. In fact, fraud victims have reported paying over $744 million in total to scammers in recent years.
You probably receive many calls on your landline from scammers trying to make you part with your hard-earned retirement dollars.
Red flags include guarantees of astonishing profits in a short time without risk, requests to pay a fee before you can receive some kind of grand prize, or demands to provide bank account numbers or other sensitive financial information.
Also, be wary of anyone discouraging you from getting advice from an impartial third party or pressuring you to make an immediate decision. What do you do if you suspect a scam?
The FTC recommends running the company or product name, along with “complaint” or “scam,” through Google. You can also check with your local state attorney general to see if it has gotten any complaints.
If so, add yours to the list to avoid any retirement financial mistakes. And remember to file a complaint with the FTC while you’re at it, too.
Retirement financial mistake: Owning too much stuff
You may not be a hoarder, but is it possible that you may have too much stuff? Let’s talk about it. According to professional organizers, the average household in our country has over 300,000 things.
A widely reported study from the US Department of Energy says that of the homes with two-car garages, 25% don’t have room to actually park their cars inside them, and 32% only have room for one car.
The Wall Street Journal says that Americans spend $1.2 trillion each year on nonessential goods, things they don’t need. So what can you do to avoid a retirement financial mistake? Retirement is the perfect time to simplify your life and take inventory of what you need and want.
Maybe you could sell some unused things you have boxed up in your attic or garage. This can be a fantastic way of putting some money towards your retirement savings or a fun adventure!
And don’t get your hopes up for gifting your “treasures” to your children. Unfortunately, many recent studies indicate that they don’t want them.
Retirement financial mistake: Claiming Social Security too early
You can begin taking retirement benefits at 62, but we recommend waiting if you can afford it.
Before tapping into Social Security, most financial planners recommend holding off until your full retirement age, 67, for anyone born after 1959. This is to avoid any retirement financial mistakes.
Delaying until 70 might be even better. If you claim Social Security at 62, then your check each month is automatically lowered by 30% for the rest of your life. But if you hold off, you’ll get an 8% benefit boost every year between ages 67 and 70 due to delayed retirement credits.
There aren’t any additional retirement credits after you turn 70. Claiming strategies can differ for widows, couples, and divorced spouses. So be sure to weigh your options and consult a professional if you need any help deciding.
If you can just live off of your portfolio for a few years to delay claiming, financial analysts say you should. After all, where else would you get guaranteed returns of 8% from the market? Alternatively, you can also begin a side gig to help bridge the financial gap.
Retirement financial mistake: Not planning for long-term care
It’s estimated that more than 70% of Americans will be needing long-term care at some point in their retired lives. This could mean a memory-care facility, retirement home, long-term hospital care, or an in-home nurse.
It’s a different category than living and health care costs, and it can get pretty expensive quickly. Presently, the average monthly fee is about $4,000 for a retirement home and $5,100 for in-home care, and little to none is usually covered by insurance.
Yet despite it being a very expensive near-certainty, many people don’t think about these costs in their retirement budgets. If you’re not careful, this could end up bankrupting you!
Let’s assume that you’ll need long-term care at a certain point and add an extra $250,000 to $300,000 on top of your regular retirement savings.
Because long-term care is often required due to a catastrophic injury or illness, it’s challenging to predict who will need it, for how long, and how much it will cost. You might want to look into getting some long-term care insurance.
Just be aware that this type of insurance is “use it or lose it.” So if you don’t end up needing it, and sadly, you’re not the one who decides that then that money just disappears.
This one might be a tough retirement financial mistake to avoid.
Retirement financial mistake: You’re not sure what you’ll be doing in retirement
This might come as a shock, but it turns out adults aged 65 and older spend threefold more waking time watching TV than young adults. And, what’s worse, they actually enjoy it less.
And while we get that we might be in the golden age of television, that doesn’t mean it’s the best way to spend your golden years. It’s vital that when you retire, you have something exciting and engaging to do and you’re not just quitting your job.
Knowing what you want to do in retirement is critical to maintaining your cognitive, mental, and physical health.
So remember to consider the financial implications of this when you plan for what to do in retirement as to avoid any retirement financial mistakes you may not have accounted for.
Retirement financial mistake: Not understanding how retirement taxes work
Tax laws about retirement are constantly changing and can be confusing. But the one thing that remains the same is this: Your retirement money WILL get taxed. The government gets its cut one way or the other. And this includes Social Security!
Way too many people think that because Social Security is a tax, it means the money’s already taxed. Sadly, it’s not. You must pay taxes on up to 85% of your benefits. Not knowing this can lead you to believe you have more money saved than you do.
So we’re just saying that taxes will be a significant factor down the road. And this is definitely a retirement financial mistake you’ll want to avoid.
However, what DOES vary is this: how much Social Security money you can expect when you retire, how much you contribute to it now, how much money you’ll owe when you begin receiving payments, and when the tax bill is due.
Is there anything more confusing than the US tax code? Don’t worry! Even money experts need help with it at times. We recommend taking advantage of the Social Security Administration’s Social Security retirement calculator to get a rough idea of where you stand.
Retirement financial mistake: Not taking care of yourself
This is probably the last thing you thought you would see on our list, but if you want to reduce financial stress, it might be one of the most important retirement financial mistakes we can tell you to avoid…Take care of yourself! Exercise and a healthy diet solve all kinds of stress.
Physical activity: Take some time each day for a bit of physical activity. If you enjoy exercise, that’s great, this will be easy for you. But don’t despair if running isn’t your favorite activity. Studies show that being physically active as you age can take many forms. Gardening, cooking, and tinkering in the garage are all physical activities that will keep you active and fit.
Eat well: If you have any bad habits, begin with some minor nutritional improvements. Limit your sugar intake, boost your fish consumption, and add some nuts and legumes. This is an excellent way to boost your brain and heart health and help prevent diabetes and cancer.
Have somewhere to go and something to do: Many studies show that having a reason to be living and getting out of your chair is crucial. And it’s even better if that purpose provides you with a daily routine. Having somewhere to go regularly is also proven to help keep us healthy and engaged.
Get regular checkups: Medicare pays for yearly checkups and has several programs to support your overall well-being. Early detection and prevention are fantastic ways to avoid physical decline.
We hope this post on retirement financial mistakes has helped you plan for your future better. But Frugal American has much more to offer its readers. For instance, check out: 8 Products You Should Always Buy at Thrift Stores
