Retirement is a goal that most of us aspire to. Even though retirement is often thought of as an ending, it is more of a beginning event. Yes, you may be done working, but a new phase of life is starting. Each phase of life has its own risks and retirement is no different.
For the benefit of those preparing for retirement, I have put together a short list of common mistakes I have seen retirees make. Please take note and consider where you may go wrong and how to prevent it.
1. Giving or loaning money to your kids
This may be the most common mistake I have witnessed, as well as the toughest to resist. As parents, we all want the best for our kids and want to see them succeed. One of the roughest things we experience as parents is watching our kids struggle. When we see our kids struggling, our instinct is to help them, but giving kids money when you’re retired can be a huge mistake.
If you have extra money to give, then feel free to give or loan as you wish. But if you don’t have extra income and you are already withdrawing 5-7% from your investments, you can’t afford to give away any money. So unless you are going to make a lifestyle change and reduce the amount of income you are living on, don’t give any away. There is also the psychological perspective that we aren’t really helping our kids by giving them money, but enabling them (I don’t think we have time to discuss this but definitely something to think about).
2. Treating retirement savings like a bank account.
Why do we save money in TSP, 401ks, and IRAs? The answer should be retirement, since they are all retirement accounts. If we are saving money for retirement, then we need to look at those accounts as an income source and not a bank account. This point is especially difficult for retirees that receive a lump sum settlement for retirement, because they aren’t accustomed to seeing a large account balance.
It is a bad idea to fund large purchases like a car, home remodel, or home purchase with retirement savings. Again, retirement accounts are designed to provide an income as opposed to acting like a bank account. If you generally withdraw $40,000 a year from your retirement accounts, but one year you decide to withdraw $150,000 to remodel your home; that is going to have a huge impact on your future.
The first consequence is taxes. By taking out $110,000 more than you were suppose to, you likely went in to the 25% federal tax bracket versus the 15% bracket. The second consequence is that you now have less retirement savings to produce income in future years.
3. Not having a budget
Yes, I have a hard time getting away from the ‘B’ word. Unfortunately, a budget is necessary in just about all phases of life. It couldn’t be more important in any phase than it is in retirement. Get a budget and stick to it if you want to increase your odds of a successful retirement.
4. Go in to retirement with a large amount of debt
I had a meeting a couple years ago where I had a guy tell me, “I’m never going to be a person that doesn’t carry credit card debt.” WHAT?! Any credit card debt should be a temporary thing, not a long term balance that you are paying 20% interest on!
Ideally, I like to see clients go into retirement with no debt other than a mortgage. If you are considering retirement and you have more debt than a mortgage and maybe one car payment, I would urge you to reconsider. Think about it – your retirement income will likely be lower than your current income, so you should probably work a little longer to get your debt paid down or even paid off before retiring.
5. Not spending enough
This is a great problem to have. I have seen many people in retirement that don’t want to spend any of their savings. They have spent their whole life saving, and have a hard time transitioning to the spending phase.
This mistake isn’t going to hurt anyone financially, but could take away from a retiree’s enjoyment. If you have spent your entire life saving money for retirement, then by all means, spend a little and enjoy the fruits of your labor! If you don’t enjoy spending money (this really does happen), then give some away to grandkids, or donate to your favorite charity.
I hope that the five mistakes listed above provide some insight into potential hazards you may encounter in retirement. If you would like a partner and coach on your retirement journey, you are welcome to contact me here or schedule a 15 minute call here.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.