Most people worry about their financial security in retirement. Taking the right steps for retirement planning success is crucial. However, even with smart planning, making money mistakes as you approach, enter into, or live out your retirement can jeopardize your security.
Proceeding through retirement cautiously becomes even more important—and difficult—as our life expectancy increases. While people once planned to survive for perhaps 10 to 20 years after leaving the workforce, today it’s not all that rare for people to spend 30 years in retirement, and perhaps longer as early retirement becomes more common.
Here are some of the most common money mistakes in retirement that can leave you short on funds and financial security in the post-work years.
Mistakes that Jeopardize Financial Security in Retirement
- Taking Social Security benefits early – If you need to start taking Social Security income for financial reasons or a disability, that’s one thing. But otherwise, it’s usually a good idea to wait until full retirement age—or perhaps even longer—to start drawing these benefits, as your monthly payouts will be higher for life. But if, for example, you start taking Social Security at age 62, this can cut your monthly SS pay by around 25 to 30 percent.
- Cashing out retirement accounts – Many retirees look for a lump sum to pay off debts, buy a new home, or other significant expenses. But this can create a considerable tax burden—as with IRAs, for instance—and put long-term financial security at risk. And, of course, you’re likely to pay penalty fees if you withdraw from or cash out retirement accounts early, in the years leading up to retirement.
- Following the “4% rule” – The 4% rule recommends that retirees withdraw 4 percent of a retirement account annually to provide steady income while protecting the balance throughout retirement. The rule has historically been considered safe since being devised in the early 1990s, as withdrawals consisted mostly of interest or dividends. But that’s not the case any longer; bond interest rates and stock returns were generally higher in the ’90s. Also, life expectancy has risen in the past 25+ years. Today, a 3% rule is more sensible.
- Paying high fees for financial products and services – Many investments simply cost too much to be worthwhile due to high fees—particularly those taken by account managers or financial advisers. They add up over the years, and can consume all or most of your gains. Be sure to read all the fine print and comparison shop for the best financial products and services.
- Taking too much risk – It can be tempting to seek higher returns in exchange for exposure to greater investment risks. But financial security in retirement is too important—and potentially too easily lost—with risky investments. Taking some informed risks with your money can be fine, but only if you definitively have enough separate, safe retirement income to last.
- Poor tax planning – Retirees must understand and plan for the tax implications of their Social Security benefits, pensions, retirement accounts, and other retirement income and investments. Otherwise, they may have significantly less funds than anticipated, or they may miss out on opportunities to use tax laws to their advantage and make their savings and income go further. This is just one reason it’s so important to consult with a tax and retirement planning expert.
- Going wild at retirement – “Wild” may be a relative term, but retirement is of course an exciting time. The sudden sense of freedom often prompts new retirees to spend extravagantly on shopping, dining, travel, a car or boat, or other expenses. While retirement is certainly a time to enjoy yourself, it’s a mistake to spend too much money too soon. If you burn through a larger chunk of your savings than you can truly afford, you’ll come up short on funds in the future.