You have finally reached the light at the end of the tunnel! It’s time to retire and enjoy the fruits of your labor. As you near retirement, there is another batch of money mistakes to avoid so you can afford to remain retired. By using your experience from your working years, you should be able to avoid these common money pitfalls.
Those in your 60s and near or in retirement have to be a little more careful than those who are younger. Money can’t be used so aggressively without consequences unless you’ve planned well in the younger years. Money mistakes are common when you get older, just as they are for those in their 20s, 3os, 40s, and 50s.
Let’s hope you’ve planned well enough to reach retirement with your savings intact and your wealth growing. If not, maybe we can help you with a solution to the common money mistakes that can happen in your 60s and during retirement.
Pitfall: You invest like a 20-year-old with aggressive stock investments. One sharp downturn can erase years of investment gains you plan to live on soon.
In your final working years and retirement years, it is important to switch to a balanced investment strategy that holds no more than 60% stocks. As you near your 70s, you might even consider holding up to 70% of your investments in bonds and fixed income assets that are less volatile.
Solution: A general rule of thumb for determining your asset allocation is to subtract your current age from 120. That number is the percentage of stocks you should hold. For example, if you are 65, you would hold 55% stocks following the “120 rule.”
Miscalculating Monthly Expenses
Pitfall: Retirees do not realize their monthly expenses can rise in retirement as employee benefits cease.
When you are still working, your employer pays for a portion of your monthly health care premiums, life insurance, and other benefits. Your share of the healthcare premiums is pre-tax in addition to your 401k contributions and lower your taxable income.
After you retire, you can be hit with a double-whammy of very few tax deductions and increased insurance payments. And, you will also have to begin paying taxes on your tax-deferred 401k and IRA withdrawals.
Depending on your state of residence, your pension and Social Security benefits can also be taxed as regular income.
Solution: Your HR department might offer a retirement planning workshop that you can attend. Otherwise, it can be worth your time to use a retirement planner with Personal Capital or your brokerage.
Spending Too Much
Pitfall: Retirees go on a “spending spree” because they are used to being able to work to rebuild their bank account balance. In retirement, your primary income is passive income. Overspending can ultimately lead to outliving your retirement savings.
It can be easy to overspend if you plan on extensive traveling, currently live paycheck to paycheck, or have credit card debt. Retiring debt-free can also help reduce your monthly expenses in retirement.
You might also consider trimming your current monthly subscriptions by switching your cable plan to DirecTV Now or Sling TV. And, Trim can also analyze your spending and cancel subscriptions you no longer use.
Solution: To avoid burning through your retirement cash, you can adopt the 4% retirement rule. By only spending 4% of your retirement savings each year, studies have shown that many retirees will not outlive their retirement nest egg.
Drawing Social Security Too Soon
Pitfall: It is possible to begin receiving Social Security payments at age 62. Your payment can increase if your delay your draw date and reduce how much you withdraw.
If you can retire before the full Social Security retirement age of 66 years and two months, it is possible to begin receiving early payments. The downside is that your payments can be several hundred dollars less each month. By transitioning to a part-time job or living off your pension and 401k/IRA contributions until you turn 66, can yield a large payment that can make it easier to make ends meet in retirement.
Solution: Wait as long as possible to start withdrawing Social Security to maximize your monthly payment. In the meantime, try to max out your 401k and IRA contributions and don’t forget about the catch-up contributions.
Required Minimum Distributions
Pitfall: When you turn 70 1/2, you will need to begin making Required Minimum Distributions (RMDs) on your tax-deferred 401k and IRA contributions. Even if you are not ready to withdraw the money.
Whether you have started to withdraw from your 401k or IRA accounts yet or not, federal law requires you to begin withdrawing money when you turn 70 ½. Your brokerage will send you a notice stating the withdrawal amount. You need also be responsible for paying any capital gains taxes on these withdrawals.
Solution: To avoid these RMDs, contribute to a Roth 401k or Roth IRA in your remaining working years as these types of retirement accounts are funded with post-income tax dollars. Uncle Sam has already claimed his share and isn’t concerned when you withdraw your Roth dollars.
You can also use an RMD calculator to project your minimum distribution amount. Talking with your tax professional can help you determine how these distributions will affect your tax bill.
Not Having a Hobby
Pitfall: After working long hours for several decades, retirees suddenly stop working and do not enjoy retirement due to a lack of activity.
One benefit of retirement is that you are no longer required to work because you can afford not to. But, that doesn’t mean you shouldn’t do anything at all. Retirement is meant to be fun and enjoyable. Keeping busy doing the things you love will keep you happy and potentially add years to your life.
Retirement is exciting and nerve wracking at the same time because of the transition. By planning for retirement, financially and mentally, you will be able to avoid the money mistakes encountered by others in their 60s. The transition to retirement is much easier if you can retire debt-free, minimize your monthly expenses, and save as much as possible in tax-advantaged retirement accounts.