All of us can do better when it comes to personal finance. Here are some relatively easy fixes for 21 common retirement mistakes that are probably hurting your lifestyle now and will have a negative impact well into your future. Most of these problems are shared by at least 50% of all Americans. You are not alone.
Big Financial Mistake #1: You Don’t Know What You Spend Money On Every Month
According to a recent study by U.S. Bank, only 41% of Americans say they use a budget. This can be a big retirement mistake – especially as you enter retirement.
When you are working, it is perhaps reasonable that you get by month to month and just do some mental accounting to make sure that bills are paid and accounts are not overdrawn.
However, to have a secure retirement, you need to know how much money you want to spend every month for the rest of your life. You can do an infinitely better job with a retirement budget if you know exactly what you actually spend money on.
Furthermore, it is almost guaranteed that you’ll find some good opportunities for cutting costs. Little things can really add up. For example, some estimates suggest that an average household wastes $1,350 to $2,275 on food each year. You may also find that you are paying too much in hidden fees, errors on your credit card bills, unused subscriptions and more…
Take one hour this week and write down everything you have spent money on in the last month. Categorize your spending. And then, do this for a few months in a row. Use this knowledge to make a better retirement plan using the NewRetirement Planner. You can create a detailed budget projected into the future. Additional ideas can be found in these articles: 14 Ways to Budget or 9 tips for Predicting Your Retirement Expenses.
#2: You Own Too Much House
Reports suggest that the size of the average American house has more than doubled since the 1950s. What’s worse however are the huge sacrifices we make to afford to live in these homes.
According to a report by the MacArthur Foundation, between 2011 and 2014, more than half of all Americans made at least one major sacrifice in order to cover their rent or mortgage payments. And, when they say sacrifice, they don’t mean skimping on eating out or a weekend away.
To afford housing, 52% of households took on a second job, did not save for retirement, avoided medical care and/or ran up credit card debt.
Experts suggest that you should spend no more than 30% of your gross income on housing.
If you own, retirement is the ideal time to consider relocating and downsizing to a more affordable home. As your biggest expense and most valuable asset, downsizing can have a massively positive effect on your retirement finances.
Want to see for yourself? Model downsizing in the NewRetirement Planner. After setting up your account, you can run different scenarios and immediately see how big and little changes impact your cash flow, net worth, estate and more.
#3: You Don’t Have an Investment Policy Statement
When it comes to your retirement investments, you will likely do best with a defined strategy. An Investment Policy Statement (IPS) is a document that defines your investment goals, strategies for achieving the goals, a framework for making changes to your plan and options for what to do if things don’t go as expected.
A good IPS should insure better financial outcomes, especially if all involved parties understand the document. An IPS is especially useful during stock market crashes and when you experience a major life change or transition.
As Ben Carlson of the blog, A Wealth of Common Sense, told Steve Chen, founder of NewRetirement in a podcast, “…it’s really about understanding yourself, your own emotions and to a higher extent your lesser self, and understanding what doesn’t work for you. And so, if you can filter out all the bad stuff and the stuff that really doesn’t fit within your investment plan hopefully whatever’s left over is just what will work for you and that you can kind of stick with and avoid all the other pitfalls that a lot of investors fall into.”
Learn more about why an IPS is the secret weapon your retirement plan needs. Or, contact a NewRetirement Certified Financial Advisor to discuss an IPS.
#4: You Don’t Know What You Don’t Know About Personal Finance
Everyone — rich or poor and young or old — knows less about personal finance than they need to know.
A recent survey suggests that financial literacy is lower than even most people might expect. Fidelity asked more than 2000 people — half who were between the ages of 55 and 65 and not retired — questions in eight different retirement categories. The average that people got right was a mere 30 percent. Absolutely nobody got all the questions correct and the highest overall grade was 79 percent. Can you do better than average?
Most articles would tell you to hire a financial advisor. However, many people don’t trust advisors — largely because it is impossible to assess whether you are getting good advice or not if you don’t have a good base of financial knowledge.
Perhaps a better way to at least start learning about personal finance is to take stock of your own situation.
The NewRetirement Planner makes it easy to get started. Enter some initial information about your finances, see where you stand and then start making changes and see what is possible — every time you update your data, you’ll get detailed feedback about how your finances change. You will learn through experience with the models. This is proven to be an excellent method for improving your knowledge of personal finance.
#5: You Aren’t Saving Enough
According to a 2018 Stanford Center For Longevity report, 30% of baby boomers haven’t saved anything for retirement, and those who have something saved, haven’t saved enough. The median balance for those born between 1948 and 1953 is $290,000. For those born between 1954 and 1959, they had saved around $209,000. That is probably only about half of what the average household needs. (Though, not everyone is average.)
An earlier study from the Insured Retirement Institute (IRI) found that a full 68% of Boomers who lack confidence in their retirement plans wish that they would have saved more and 67% wish that they had started saving earlier.
- Do you own your home? If so, have you factored how your home equity can subsidize your retirement finances either now or at some point in the future?
- Still feeling pretty good? Working a little longer — either part or full time can dramatically improve your long term finances.
- Can you delay the start of Social Security to boost your monthly benefit?
- Do you know what is important to you? If you focus on priorities, cutting expenses doesn’t have to feel like a burden.
Use the NewRetirement Planner to “try on” these strategies. This easy to use tool takes retirement planning way beyond savings and assets. This planner is designed to help everyone. Assess which options will give you a secure retirement.
#6: You Don’t Have a Plan for Turning Savings to Income
You have spent your whole life working and saving money — paying down your mortgage and putting some away for retirement.
Retirement IS the time to spend it. This is a HUGE perspective shift and something that people find problematic. Figuring out an efficient way to spend your money while making sure that you don’t run out can indeed be tricky.
You need to develop retirement income strategies. Explore 18 ideas for lifetime wealth and peace of mind, including ways to guarantee your income.
#7: You Own Too Much Stuff
You probably have too much stuff. Don’t believe me? Consider this:
- According to professional organizer Regina Lark, the average U.S. household has 300,000 things.
- A widely reported study from the U.S. Department of Energy reports that of the houses with two-car garages, 25% don’t have room to park cars inside them and 32% only have room for one vehicle.
- The Wall Street Journal reports that Americans spend $1.2 trillion annually on nonessential goods—stuff they do not need.
Retirement is an excellent time to simplify your life and take stock of what you really need and want. Maybe you could even sell some of your unused treasures with the proceeds going toward retirement savings or a fun experience!
And, don’t get your heart set on gifting your treasures to your children. Many recent articles indicates that they don’t want it.
#8: You Are Paying for Storage
Still don’t believe that too many Americans have too much stuff? According to self storage industry statistics, nearly one out of every 10 Americans (9.5%) rent offsite storage. Are you paying to store stuff you don’t use?
If you have a storage unit, seriously consider whether or not it is a necessity in your life. Clearing it out will take an afternoon, a weekend or even a month or two, but getting rid of this burden could be well worth the short term hassle. Here is how one person tackled clearing out their storage unit.
#9: You Are Paying for College but Can’t Afford Retirement
According to a survey by T. Rowe Price, about 53% of parents surveyed felt that it was more important to help their child pay for college than to save for their personal retirement. And, 68% of participants said that they would are willing to delay retirement to fund college.
Take a moment to think clearly about the future. Not saving (or spending your retirement savings) now will have a profound impact on both you and your children. Are your children going to be able to take care of you in the future the way you are taking care of them now? Do they want that responsibility as you age? Do you want to give up your own autonomy and be beholden to them? Walk through the NewRetirement Planner with your children for a clear picture of your — and their — financial future.
#10: You Sacrifice Your Livelihood to Care for Aging Parents
According to the Caregiving Action Network, more than 65 million people, 29% of the U.S. population, provide care for a chronically ill, disabled, or aged family member or friend during any given year and spend an average of 20 hours per week providing care for their loved one.
Caring for your aging parents can be a labor of love. In fact, many people find it to be one of the most rewarding experiences of their lives.
However, it is important to acknowledge the financial costs of care taking. There is the lack of income, but also the lack of saving for retirement during that time and also a potential reduction in Social Security income because you are not accumulating credits when you are not working.
Actually, there is no easy fix here. However, a few things you should do before you take on a care taking role:
- Actively consider how you or you and your spouse can make up for financial losses.
- Get a really good handle on your current and future finances and assess how care taking will impact your future.
- Evaluate your parents’ finances. Can they compensate you financially? Is there a better financial solution for their care?
- Would merging households be a viable option to generate liquidity from the sale of a home to help fund care taking and reduce costs?
#11: Taking Social Security Too Early
According to a report by the Center for Retirement Research at Boston College, 90% of Americans begin Social Security retirement benefits at or before their full retirement age. In fact, the most popular age to start is 62, the earliest age possible.
Guaranteed retirement income — income that you will receive every month no matter what and for as long as you live — can be the key to a secure retirement. Social Security is one of the best sources of guaranteed retirement income. This is why maximizing your Social Security income is a good move.
If you have not yet started your Social Security, the best thing you can do to live more comfortably in retirement, is to wait to claim your benefits. If you have reached normal retirement age, which is 66 for people who were born between 1943 and 1959, you can access 100% of your benefits.
#12: You Have too Much Debt
If you don’t have debt, you are in the minority. The average American household debt load, including mortgage, is $101,915 and it is estimated that 77% of American households have at least some type of debt.
Here are 13 tips for dealing with debt.
#13: You Hold Too Much Cash
Of all the tactics you can use to achieve a secure retirement, one of the easiest things you can do is to invest your money and earn returns on that investment. Doing this requires virtually no sacrifice, compromise or a lot of work.
However, a study from BlackRock found that Americans hold 58% of their invest able assets in cash where little or no interest is earned.
Get out of cash and into some kind of holding that can earn interest or dividends. Learn more about the best asset allocation for retirement.
#14: You Don’t Have an Emergency Plan
In addition to saving for college and retirement and just paying the bills, you should also always have an emergency fund. Before you are retired, experts recommend that you have the equivalent of 6 months of income saved and available. When you are retired, you may want even more since you may be living off withdrawals and need to protect your money from ups and downs in the financial markets.
However, The Atlantic, uncovered shocking analysis from a study by the Federal Reserve Board. They found that nearly half of all Americans – many in the middle class – would have trouble coming up with just $400 to pay for an emergency.
Set aside an amount of money to be used for emergencies. Be sure to replenish these funds when used up.
#15: Not Planning for Medical Costs
Medicare does not cover all of your medical expenses, not by a long shot.
According to recent data from Fidelity, the average out of pocket health care expenditure for a 65 year old couple today will be a whopping $315,000 — not including long term care costs. Healthcare is the second biggest retirement expense after housing.
What you can do about it
- Include healthcare costs in your planning. The NewRetirement Planner helps you estimate these costs and applies them to your annual budgets throughout your retirement plan.
- Consider healthcare costs if you plan on retirement before Medicare eligibility at age 65. Explore 9 ways to cover your health costs for an early retirement.
- Engage in regular exercise and follow a healthy diet to keep the pounds off and keep your blood pressure at a lower level. Cutting out alcohol and cigarettes can also help you avoid possible medical conditions and expenses in the future.
- Re evaluate your supplemental Medicare coverage each year to make sure you have the best plan for your current condition.
#16: Not Having a Long Term Care Plan
Dementia. Stroke. Alzheimer’s disease. The prevalence of these health events is a big reason why you need to make planning for long term care an important part of your retirement plans.
While about 70% of Americans who get to age 65 will need some type of long-term care, many Americans are unprepared for this reality.
Develop a plan. Insurance is only one option for funding long-term care.
The NewRetirement Planner allows you to try out different ways of funding care, from insurance and old age annuities to having a family member support you, the tool allows you to assess the pros and cons of different options and see how it impacts your retirement finances.
#17: You Don’t Think About Minimizing Taxes
While taxes may be less of a factor after retirement than before, they can still add up to hundreds of thousands of dollars over your remaining lifetime.
#18: You Are Stuck in a Rut and Think You Can’t Get Ahead
If you are stressed about money or how to fund retirement, you might just need to change how you think about the problem and what you are doing.
Flipping your perspective enables you to see things in a new and different way. This fresh approach can change your attitude and help spark creative ways of approaching a problem — even a problem like how to retire.
#19: You Aren’t Sure What You Are Going to Do in Retirement
Do you want to hear something kind of depressing? Adults aged 65 and older spend threefold more waking time watching TV than young adults. And, what is worse, they enjoy it less. In the American Time Use Survey, TV watching accounted for 25%–30% of waking time and half of leisure activity among adults aged 65 years and older.
Sure, we may be in the golden age of television, but that doesn’t mean that it is the best way to spend your golden years.
It is critically important that you retire to something interesting and engaging and not just retire away from your job. Knowing what you want to do in retirement is critical to maintaining your mental, cognitive and physical health.
Make sure you have a plan for what to do in retirement. Not sure, explore these resources:
#20: Underestimating Your Life Expectancy
It is not adequate to assume that you only need enough retirement assets to sustain your lifestyle through the age of 75, 85 or even older. The fact of the matter is – you have no idea how long you are going to live.
Statistics suggest that there is a greater than 50 percent chance that at least one partner from a couple in their 60s will live to the age of 95.
Does your retirement plan enable you to live till 95? Will you outlive your assets?
Here are a couple of suggestions for planning for something that you can’t possibly predict, your longevity:
- Use a life expectancy calculator to help make a more educated guess as to your longevity
- Plan for a best and worst case scenario with the NewRetirement Planner. This tool allows you to enter an optimistic and a pessimistic goal age and assess your finances for either eventuality.
#21. You Pay Too Much for Financial Guidance
For some, paying for financial guidance is well worth the cost. Especially if you are paying an hourly rate for the advice.
However, most financial advisors charge a fee based on how much money they manage for you. That Assets Under Management (AUM) fee typically ranges from 0.25% to 1% or more per year. So, if they are managing $500,000, you are paying them between $1,250 (.25%) and $5,000 (1%) every year. This fee is often paid for them to actively manage your investments. Sometimes you also get comprehensive planning guidance as well.
The NewRetirement Planner enables you to create a comprehensive financial plan similar (and in some cases better) than what you can get from an advisor. And, you can hire a low cost coach to help you make sure your information is entered correctly into the plan.
If you think you need more hands on support, but don’t want to pay AUM fees, you might be interested in guidance from a fee-only advisor. Fee-only advisors charge an hourly or flat fee for advice. However, you typically take action on that guidance by yourself.
- Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify and achieve your goals. Set up a free discovery session.
#22. Failing to Protect Yourself from Financial Fraud
Financial fraud against people 50 and older is a growing concern. Older Americans lost $1.6 billion in 2018 due to financial fraud, and the average victim lost $1,023 according to the FTC.
And, researchers have discovered that as we get older, core financial skills can become diminished. Researchers call this age-related financial vulnerability. Our cognitive abilities change in a way that can negatively impact our capacity to make good financial decisions. Becoming victim to fraud as a result of a decline in these capacities is of particular concern.
#23. Making Emotional Financial Decisions
Emotions can be a double-edged sword in financial decision-making. Unbridled optimism can lead to reckless investments, while fear can trigger hasty withdrawals or risk aversion, hindering individuals from seizing beneficial opportunities.
Emotional choices often undermine rational, long-term financial strategies, leading to impulsive actions that may result in financial setbacks and missed gains. Balancing the useful aspects of emotions with their potential harm in financial decisions is a constant challenge for investors and savers.
It can be useful to gain an understanding of behavioral finance in order to use emotion effectively when it comes to money. Explore 16 brain tricks to help you make better financial decisions.
#24. Missing Out on the Tax Benefits of an HSA
Health Savings Accounts (HSAs) are a powerful savings vehicle due to their unique combination of tax benefits, investment potential, and flexibility. Contributions to HSAs are tax-deductible or pre-tax, and the funds grow tax-free, allowing for significant long-term savings.
Unlike other healthcare accounts, HSA funds roll over from year to year, providing an opportunity for compounding growth. Furthermore, the ability to invest HSA funds in various financial instruments can amplify their potential over time. HSAs offer financial versatility, allowing for the payment of qualified medical expenses or serving as a retirement savings tool after age 65.
This adaptability, along with the absence of income limits, makes HSAs accessible and invaluable for individuals looking to secure their financial future while simultaneously addressing healthcare needs.
See if you qualify to fund an HSA.
#25. Retiring Too Early (or Too Late)
Retiring too early or too late both come with their own set of challenges and potential drawbacks. Retiring prematurely, while offering the benefit of more leisure time, can strain financial resources if one hasn’t adequately saved or planned for a longer retirement. This may lead to financial stress, reduced quality of life, and even a need to re-enter the workforce. On the other hand, retiring too late, beyond the point of personal well-being or enjoyment, can result in missed opportunities to pursue one’s passions, travel, or spend quality time with loved ones.
Develop a detailed retirement plan to help you gain confidence that you will retire at just the right time.
#26. Spending Too Much (or Too Little) in Early Retirement
When people come into a large sum of money, it is tempting to feel more wealthy, Sitar explains. As a result, some people end up overspending during the first few years of retirement.
Having access to your retirement savings can be dangerous. The temptation to spend can be like the temptation to have a big slice of the chocolate cake that was left out on the counter.
Conventional wisdom is that you should only withdraw about 4% of your nest egg to live on per year, Sitar says. “But even that has come into question lately in the low interest rate environment that we are in,” he added.
The best retirement solution is to be extremely careful with your retirement planning. Set goals for what you want to do, and budget accordingly. It can be okay to spend more when you retire, just make sure that you put that into your retirement plan.
Some retirement calculators let you set different spending levels for different times during retirement. This is a great way to see if you can afford the splurge or not.
#27: You Don’t Have a Written Retirement Plan and You Don’t Keep it Up to Date
Only 30% of American have a long-term financial plan that includes savings and investment goals.
Furthermore, Americans tend to spend more time on research about vacation than they do on retirement planning even though retirement planning needs to be an ongoing activity.
When you retire, you are no longer living month to month or year to year. When you stop working, you are dealing with a finite set of financial resources that need to be budgeted to fund the rest of your life. You really do need a plan.
Assess what you have and what you need for retirement. Find ways to improve your situation. Do it right now. The NewRetirement Planner is a detailed and reliable system. This tool will save your information so it is easy to make updates and improvements.