In your twenties or thirties, purchasing your first home is the most daunting financial decision you’ll probably make. But as you progress toward retirement, a much bigger decision looms large: how to fund your lifestyle when you’re no longer working. The stress of living without employment income, the pressure to live up to your own retirement expectations, and the uncertainty of the whole undertaking conspire to trigger unwise decisions even in otherwise financially savvy people. Here are the five biggest retirement mistakes.
Delaying Insurance Purchases
Insurance such as life insurance and long-term care insurance can feel like money down the drain when you’re living on a fixed income, particularly if you don’t know whether you’ll ever actually use long-term care insurance. These policies increase in price as your age goes up, so the time to purchase is always now. By making the decision now, you may lock in a lower rate, not to mention protect yourself against financial disaster.
Moving Without Careful Thought
Sick of the cold and want to join other retirees in Florida? Ready to downsize to a smaller, safer home? Hoping to save money by renting a small townhouse? Think carefully before you take the plunge. You need to have a clear understanding of what your new living situation will be like. Don’t rely on fantasy.
Remember also that your home is probably your biggest investment. It can be a source of cash in times of need, and if it’s paid off, provides significant financial stability. If you’re over 62, you can even access your home’s equity in the form of a reverse mortgage. This loan doesn’t have to be repaid as long as you remain in your home and follow the loan’s terms. So think carefully before bowing out of the home that gives you this flexibility.
Expecting a Lifestyle You Can’t Afford
Your fifties were likely the time that you earned more than ever before. When you’re earning big, it’s easy to become accustomed to lots of vacations, lots of eating out, and a lavish lifestyle. Retirement may require you to scale back. Even if it doesn’t, you’ll have more time to fill than before. Don’t fill it all with expensive meals and expensive entertainment, or you’ll soon find yourself looking for another job.
Not Being Realistic
We all have our biases. Some of us are blindly optimistic, while others can’t shake negative thoughts. An unrealistic bias in either direction can undermine your retirement. Pessimists may underestimate the strength of their savings, living a more frugal and stressed-out life than is really necessary. Optimism can convince you that the economy is stronger and your savings more abundant than is really the case, spurring you to overspend. Get a reality check with a financial planner, and stick to a spending plan based on ongoing assessments.
Relying on Hobby or Consulting Income
Selling vintage goods, consulting, an Etsy store, or an Ebay empire are all excellent strategies for bringing in extra income. If you have to rely on them to survive in retirement, though, you’re already in trouble. These streams of income are inherently unreliable. If you need a second income and know you have to earn a specific amount each month, consider a part-time job instead. Consulting and hobby income can offer a little spending money, but these strategies offer little assurance of reliable income.