Retirement can be a special place to be, and most people look forward to it. It means that after years of hard work, saving money, and making investments you can finally kick back and enjoy the good life. However, some retirees find their new place in life to be stressful. There are several critical financial pitfalls to consider as the years go by that make people dread the question "Are you ready for Retirement?" and while no one likes to think about it, failing to prepare for this is the biggest mistake a retiree can make during their after-work life.
To make the most of this new phase of life, be on the lookout for these 10 common financial mistakes:
1. Not having a Budget.
We may not have control over how the market plays out, but we do have control over how we spend or save our money. Which is why it’s crucial for all retirees to come up with a budget and stick to it.
The Fix: Grab pen and paper and take the time to create a realistic budget for yourself. Start with your core expenses, monthly bills, food, transportation, etc. Whatever money remains after that, you can use to treat yourself or to save up for a vacation abroad.
2. Taking out your Social Security benefits too soon.
Even though you may start collecting your Social Security Benefits at age 62, you are looking at a 25% reduction on your monthly check. At age 66 you receive your full pension, but, at age 70 you may be looking into a 32% increase.
The Fix: If you have other financial assets you can tap into of your SS pension instead. Take a look at the bigger picture and gather all the assets you currently have. Also, consider when you are planning to stop working, your health, and the impact it will have on your spouse.
3. Acting on financial advice from friends and family.
These days everyone seems to be a financial savant, and they love to brag about how they have come up with the best way to manage money. However, bear in mind that not everyone has the same interests as you do, and what may work for them may not work for you.
The Fix: Think about what your unique circumstances are and what your goals are going to be. Hire a certified financial planner if you are having trouble with this.
4. Failing to come up with an effective tax retirement distribution plan.
Many retirees are unaware that every retirement plan is taxed differently, which could lead to paying more taxes than you should.
The Fix: Start by tapping into the least expensive asset first. For example a non-taxable investment, or any other with the lowest interest rate or growth. It is important not to deplete any resources, you can make all of your accounts work in harmony with the right distribution strategy.
5. Investing too much in a property.
As unbelievable as it may sound, a lot of retirees spend between 40% and 50% of their income on their homes. While the Real Estate industry says this is good, you need to remember you just retired, keep your housing costs between 10% and 20%.
The Fix: Downsizing. As a retiree ask yourself "Do I really need this four bedroom home?" You can use the profits of the sale to give your accounts a much-needed boost.
6. Providing adult children with financial support.
As a parent, it is impossible to resist the desire to help your children regardless of their age. They may need help to make ends meet or a small loan to make the down payment on a house. Whatever the reason, as a retiree you need to remember that you cannot replace that money while your adult children, who are working, can.
The Fix: It’s simple, have a sit down with your children and explain the reasons why you can't be financially responsible for them, especially if they are old enough to work.
7. Not preparing for changing expenses.
As a retiree, certain expenses go down, for example, you are no longer expected to commute to work every day or show up with expensive suits. However, other costs will increase significantly, according to recent studies during the course of retirement health care expenses will go as high as $220,000 due to multiple factors including age and rising health costs.
The Fix: Once again the solution is to come up with a realistic budget, this time mainly focus on health-related expenses. Take into account your Medicare or COBRA copays.
8. Falling victim of fraud or purchasing unnecessary services.
Once you are retired, all your needs will change, and some financial services won't be needed. For example, life insurance with the purpose to replace lost income for your dependents is unnecessary if you are no longer earning money. Additionally, there are many fraudulent services preying on retirees.
The Fix: Review all your insurance policies in depth and see if they still make sense to you. You can always hire a certified financial planner to advise you.
9. Failing to get your affairs in order.
This is a delicate issue for most retirees, nevertheless, it is worth the emotional toll. Consider investing time and talk to an estate planning attorney to get all of your documents up-to-date. Make sure you have a will drawn up.
The Fix: Talk to a lawyer ASAP. Get a will, a financial power of attorney, and all your health care directives in writing.
10. Having financial disagreements with your spouse.
If you are a pennysaver and your spouse is an aggressive investor you may want to sit down and talk about it. During retirement, it is important to be on the same page on every financial aspect.
The Fix: If the disagreement persists, hire an objective third party to provide you with financial advice. As a matter of fact, according to recent surveys, 44% of retired couples rely on financial advisors while 34% prefer to handle it on their own.
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