Top 10 Money Mistakes That Retirees Make

Retirees need to be smart consumers if they are going to make retirement the best possible time of their lives. Avoiding these 10 mistakes can help.

1. Assuming That Expenses Will Drop

Most retirees assume that once they quit working, their expenses will go down, but this is not necessarily true. In fact, many people find their expenses remain the same or even increase after retirement.

When people have more leisure time, they tend to spend more money. Medical costs might add several hundred dollars each month to their cost of living; experts predict that by the year 2031, retirees will pay 90 percent of their health care costs. Retirees who decide to move may also find a higher cost of living in the new area.

2.  Spending Too Much Too Fast

In early retirement, some people are tempted to spend a big chunk of savings right away. The more frugal they are, however, the better off they will be. The less they withdraw from their savings, the more the remainder can continue to grow. 

3.  Underestimating Possible Health Care Costs 

As more Baby Boomers reach retirement age, health care costs are likely to skyrocket. Even though the average American’s overall quality of health is less than desirable because of improper eating and lack of exercise, people are still living longer than ever before. Therefore, since people will need more health care during their lives, the long-term cost of health care will likely rise.

One way a person can overcome long-term health care expenses is to purchase long-term care insurance to cover the expenses of long term care if necessary.

4.  Overestimating Retirement Accounts and Social Security 

When retirees think short-term, they often do not realize that inflation will cause their expenses to rise while their income remains fixed. Assume inflation will increase over the years of retirement. If retirees do not add inflation into their plan for retirement, they will find themselves living on a fixed income while prices continually escalate. This will decrease their buying power during the time in their lives when they should be enjoying themselves.

The government designed Social Security to help a person with retirement. The plan was to help a person save for retirement, not to cover all the costs of retirement. The money a retiree receives with Social Security will not keep up with inflation. Whatever money they receive will soon lose buying power, since the cost of living will increase, while retirement income and Social Security can remain fixed.

5. Cashing Out Old Retirement Accounts Early

Almost everyone who cashes in old retirement accounts early regrets it later. Instead of cashing it out, a good alternative would be to roll it over into an individual retirement account (IRA).

Unless retirees’ IRAs are their only income, they should wait to withdraw from it. A person must be at least 59½ years old before he or she can withdraw without paying a 10 percent penalty. A person would also have to pay taxes on this money, so it makes even more sense to wait a few years before withdrawing from this fund; during that same time, the money will continue earning interest.

The worst part of withdrawing this money early is a person they will never gain the advantage of having this extra income for retirement.

6. Selling the Home

After retirement, many people decide to sell the home where they have lived for many years, perhaps to be closer to extended family or to enjoy better weather. The key is not making the mistake of hastily selling and moving; instead, investigate the idea completely before taking the big jump.

Another possibility retirees might consider is staying in their current homes and obtaining a reverse mortgage. Anyone considering this should be cautious and thoroughly research the company they would be doing business with and all the financial details of the reverse mortgage.

7. Investing Entirely In Fixed-Income Securities

When people retire, they should invest in something that will give them income over the long term, in addition to adjust fixed income securities. A retiree should never put all of his investments into one item; he should seek to appropriately diversify his income portfolio.

8. Taking Social Security Benefits Too Soon

Two-thirds of retirees sign up for their Social Security, taking reduced benefits, before they are 65. If retirees wait until the age of 65 to begin receiving benefits, they will receive 20 percent more each year. This can be quite a large sum over the years.

9. Taking a Company Pension Distribution in Cash

When people take a company pension distribution in cash, rather than in payments each month, the government withholds 20 percent. To avoid this scenario, the money should be sent straight to an IRA; retirees can later withdraw the money in increments, as it’s needed.

10. Simplifying Estate Planning         

In most cases, retirees need more than a simple will to protect their estate.  Living trusts can avoid probate, and variable annuities and life insurance can pass assets automatically to heirs. Charitable trusts can also reduce estate taxes.

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