5 basic money mistakes retirees make
Habit, unrealistic expectations or an impulse to help can have costly consequences, particularly for people who are no longer earning an income.
Not everyone's golden years are so golden.
Many retirees still make basic money mistakes -- the type most commonly associated with younger and less financially experienced people. Sadly, such errors can derail their plans for a peaceful and financially secure life after work.
Most of these missteps can be avoided with planning and forethought. But if you fail to take the steps necessary to prevent them, your long-awaited golden years could quickly lose their shine.
These are five basic money mistakes that are common among retirees.
1. Failing to establish or follow a budget
Although it is one of the most elementary financial mistakes, living without a budget is a common pitfall for retirees.
"People don't track their spending," says Mari Adam, a certified financial planner in Boca Raton, Fla. "They have no idea how much they spend. Overspending is the most common problem we see."
Andy Tilp, a certified financial planner at Trillium Valley Financial Planning in Sherwood, Ore., says that many of his retired clients have no sense of their cash flow and aren't aware of how much money is coming in and going out each month.
"Eight out of 10 times they don't have that," Tilp says. "I've actually had clients get mad at me. It's a real wake-up call. Because if you don't know your expenses, there's no way to really understand if you're going to be able to continue a lifestyle."
2. Not understanding inflation
Underestimating inflation -- or worse, failing to understand it -- can easily deflate a retirement plan.
"I think one of the biggest errors a retiree can make is not planning for inevitable inflation," Tilp says. "It is statistically likely that a person age 65 will live at least two more decades. During that time, the purchasing power of an individual's money is halved assuming a historical 3 percent inflation rate."
Not understanding inflation can lead retirees to overly optimistic decisions to draw from their retirement resources early, he adds.
"Because there is a lack of understanding of the impact of inflation, individuals often start their retirement income sources as soon as they can without understanding the consequences," he says.
3. Drawing on savings too readily
Whether they understand inflation or not, a lot of retirees make the mistake of dipping into their Social Security benefits or retirement accounts as soon as they possibly can.
"Don't just make a knee-jerk reaction, 'Hey, I'm 62, I'm going to take it,'" Adam says on deciding when to draw Social Security benefits. "Think it through."
Too often immediate gratification trumps long-term planning and patience, Tilp says.
"The common refrain is 'I'm going to get the money now,'" Tilp says. "This applies to Social Security, pensions and annuity payments. These income sources are likely to continue to grow to a certain age if they are left untapped. Thus, by waiting, an individual can realize much more income later in their life when it may be needed to offset health care and possibly elder care expenses."
4. Lending essential funds to family members
Lending or giving money to family members, particularly if that money is critical to your retirement budget, is yet another way to invite financial threats into your retirement.
Adam has seen clients dip into their nest eggs to pay rent for an adult child or private school tuition for grandchildren.
"Maybe 10% get into trouble helping adult kids in their 30s and 40s," Adam says. "Sometimes, it's just paying rent. Usually the kids are underemployed."
Some retirees may be tempted to help adult children who are having financial difficulties following a divorce or breakup. Josh Koehnen, a certified financial planner in San Diego, Calif., knows a retired couple who decided to draw from their savings when a daughter came to them after a broken engagement.
"After exploring several options, they decided to pull money out of their nest egg in order to add a room addition to their home," Koehnen says. "They now have their daughter and two children living with them in the room addition. The construction costs ran way over their initial estimates and the dent in their nest egg has caused them to really tighten up spending."
5. Overlooking taxes
Failing to consider the impact of taxes, including those incurred from retirement account distributions, can lead to costly surprises for retirees.
Adam knows a retired couple who failed to consider taxes and paid a hefty price. The couple decided to use money from a 403b plan to finish buying a house and ended up with an enormous bill from the Internal Revenue Service.
"I think the tax bill was something like $150,000, and that could have been avoided," Adam says.
She's also seen clients underestimate the tax costs of withdrawing cash from a 401(k), pension or individual retirement account. But whatever the financial transaction, including taxes in your calculations can help you avoid unexpected financial jolts.
"Always put taxes into equations in retirement," Adam says.
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THE RULE OF 72
Divide the interest rate you will get into 72 and that will give the approximate number of years it will take to double your money. Unfortunately in this low interest rate environment seniors have gotten the shaft in the last 3-4 years. Presently, if you had your money in the local bank at 1% (it's actually way less than that) it would take you 72 years to double your money (before taxes on the interest).
If we went back to the days of bank interest rates of 6% it would take only 12 years to double your money. So you see why I say this lot of coming retirees got shafted. Seniors have to be very careful with how they use their money to get it to last long enough during their lifetime. Reverse mortgages get low monthly quotes when home values are down and much higher monthly quotes when home values are higher. That's why you see so many reverse mortgage ads on TV in the last few years - which are taking advantage of seniors in a low housing value environment.
Annuities - the older you are to start the more money you'll get - but be prepared to shop many companies because there's a huge difference between companies. Buying Long Term Care policies is best purchased in a higher interest rate environment otherwise it'll cost you more - because the company can earn more money on your premiums in a higher interest rate environment. Bernanke and his policies are pushing seniors towards the stock market in order to get some semblance of return on their money because you can't get returns at the bank. I will not comment on the market with the exception of saying be very careful... it is not for people who are amateurs. If you don't know what you're doing be prepared to pay for professional help - and make sure you interview more than 3 or 4 financial advisors preferably with a trusted friend who is an astute business friend that knows how money works. I wish you all well in all that you do.
These are excellent reminders. It is important to remember that for each year beyond 66 that you do not collect SS that your benefits increase 8% up until age 70. We continue to work and know that that will enable us to live a bit better and perhaps increase our life span, with diet and exercise.
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