To make sure your money
lasts, you need to watch out for these pitfalls
by
Rodney Brooks |March 18, 2019
These tips will keep you
on the right road.
Saving for retirement
isn’t easy, but figuring out how to manage your money after retirement is
pretty tough, too.
While you’ve had lots
of practice at saving money, now you have to figure out how to make that
savings last for the rest of your life—and since you may not have much in the
way of income, you don’t have a big margin for error.
That first year, in
fact, may be the most difficult of them all. Flush with excitement, many new
retirees rack up big bills. “Typically, you will see more spending in first
year,” says Greg Hammer, president of Hammer Financial Group in Schererville,
Ind.
Below are some of the
biggest pitfalls to watch out for.
Treating yourself a
little too well
Retirement is here!
Time to treat yourself, right?
“People say, “‘I’ve
been waiting to do this. It is on my bucket list,’” says Rich Ramassini,
director of strategy and sales performance at PNC Investments. Unless you have
a solid source of post-retirement income, however, a big initial spending bump
can be a major threat to your retirement security.
That’s not to say you
need to practice full-on austerity. If you’ve always wanted to take a
month-long trip, or spend an extended summer at the beach, that’s okay. “As
long as you factor that in, it’s not a problem,” says Hammer.
In fact, Hammer says,
you can usually spend as much in your first five years of retirement as you
spend in the 10 years after that. A financial planner can help you run the
numbers and come up with a target annual budget for now and the future.
Not planning for
unexpected expenses
Many financial
planners recommend that working people keep three months of living expenses in
a savings account, in case of a sudden job loss, medical crisis or other
unexpected expense.
But while you don’t
have to worry about job loss after retirement, the need for a cash cushion is,
if anything, even more critical, says Eric Bailey, of Bailey Wealth Advisors in
Silver Spring, Md.
“You
are always going to have some kind of unforeseen expense, whether its health
care or your house.”
Financial
planner Eric Bailey
“You are always going
to have some kind of unforeseen expense, whether its health care or your
house,” he says, “Emergency cash is the buffer that allow you to cover the debt
without going into your investment portfolio or going into debt to cover that.”
Taking Social
Security too early
About a third of
people opt to take Social Security as soon as they qualify, at age 62. Some do
it because they have to, and others do it because they don’t trust that Social
Security will be around when they are retired.
But if you start
taking benefits at 62, you’ll be locking in a benefit that is 30% lower than
what you would receive at full retirement age (65 or 66, depending on when you
were born).
Every year you wait
after full retirement age, your benefit increases by 8%. If possible, you may
even want to hold off until age 70, when benefits are highest.
Letting emotions rule
your investing decisions
Even those who live
by the mantra of “set it and forget it” during their wealth-building working
years sometimes run into trouble post-retirement, says Philadelphia financial
planner Kyle Rolek, “People have more time in retirement to watch the news,
listen to ‘market experts,’ and ‘study the markets,'” he says.
Every year you wait after full
retirement age to take Social Security, your benefit increases by 8%.
But if that habit
translates into yanking funds in and out of accounts, or moving into
investments that may be too risky for them at this time in their lives, “It’s
an expensive hobby,” Rolek says.
On the flip side,
retirees who feel anxious about losing their money in the market sometimes
become too conservative, keeping too much of their savings in cash or
fixed-income investments. But if your retirement spans several decades, you’ll
need the higher returns of stocks to grow your savings.
Especially if your
spending start to look different than you’d planned, it may be worth sitting
down with a financial advisor to make sure your investment strategy still
matches your goals.
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