You spend the majority of your working years saving and preparing for the golden age when you can retire and live freely. When retirement finally rolls around, the change can be both exciting and intimidating.
Retirement is not all fun and games, though. Without the right plans in place, you could wind up spending or losing more money than you intended, leaving you without financial protection for the remainder of your retirement. As you prepare for retirement, be mindful of these five major mistakes retirees often make with their money and understand how you can avoid making them.
1. Spending too freely: The No. 1 mistake retirees make with their money is spending way too much way too soon. It’s easy to get carried away—with your days and weeks wide-open and the ability to fulfill your wildest dreams, you might be tempted to spend a lot very quickly. However, this could leave you without enough money to live off of in future years. The best way to avoid this is to create a budget based on your retirement savings and stick to it, building in regular expenses as well as “fun” expenses.
2. Not having withdrawal strategies: Every type of retirement account will have a different taxation structure and pulling money out of your accounts with no reservations can lead to heavy tax fees. Work with a financial planner to identify the best strategy for fund withdrawals so you pay as little in taxes as possible.
3. Making investment mistakes: Managing investments after retirement can be tricky, since your investment strategy will likely need to change from what it was when you were first building your portfolio. Proper portfolio management and rearrangement are essential to maintaining liquid, lucrative assets. Some retirees hold on to risky investments for too long to avoid paying capital gains taxes, while others become too conservative with investments and don’t focus on high-return options at all. Mismanaging your portfolio can make a difference of thousands of dollars you may need one day.
4. Starting Social Security too early: You can start collecting Social Security checks once you turn 62, but cashing in on your benefits as early as possible isn’t always the best strategy. Your benefits can get much higher if you wait just a few years, which could put you in a much better position financially. Consider utilizing other sources of income for your first few years of retirement, then cashing in on Social Security when the benefits are better.
5. Not establishing an estate plan: During retirement, you’ll mostly be focused on how to manage your income to have a stable lifestyle. However, many retirees forget that they can’t take their wealth with them after they die, thus forgetting to create an estate plan. By forgoing the implementation of an estate plan, you might create problems for your heirs when they attempt to inherent your assets. Setting things up in wills, trusts and other accounts will organize your assets in the best way to prevent probate, estate taxes and other costs after you’re gone, keeping your estate as valuable as possible.
The best way to avoid making these mistakes is to seek the guidance of a retirement financial advisor. By working with a professional, you can more easily create a plan for retirement that will help you make sound financial decisions while enjoying your years to the fullest.