It’s a common misconception that retirement is the end of your working life. In reality, it can be a time to reinvent yourself and do what you’ve always wanted to do with your free time. However, many people make mistakes before they retire that have a negative impact on their finances during retirement. Since knowing which these common mistakes are is the first step to avoiding them, here is a list of 7 things not to do if you’re about to retire:
#1 Spending all your savings or your emergency fund
One of the most costly mistakes you can make before retiring is using up all your savings or your emergency fund in a spending spree. The one thing people who are about to retire need is a good financial safety net that will provide for their livelihood during retirement, so withdrawing early to spend on something that’s not necessary will end up costing you down the line.
If your retirement is looming near, you should be saving as much as you can, not spending more than ever. There are many different ways to cut down your spending to give your saving a boost. For example, it may be time to cancel non-essential subscriptions and other recurring payments. It’s also a good idea to get an AARP or AMAC membership to start cashing in no different retiree discounts.
#2 Taking out risky investments like stocks and cryptos without diversifying.
When it comes to investing, risk tolerance plays an important role in our decisions when choosing assets. As a general rule, younger people can afford to take on more risk because they have time to get back on their feet or ride out a temporary market downturn without selling their positions.
However, when you’re near retirement, the opposite happens. In this case, you can’t afford to make investments that could jeopardize what will provide your main source of income during retirement. Since you won’t have a steady paycheck once you retire, protecting your nest egg should be your #1 priority. This is why it’s generally not a good idea to invest in risky assets such as stocks or buy emerging cryptocurrencies without thoroughly analyzing your investment beforehand.
On the other hand, if you’re set on investing more aggressively to give your compounding interest a boost right before making the jump, diversification is the key to spreading risk as much as possible. Before choosing your assets, you should learn all you can about investing and do due diligence on any potential stock you find promising, even if it was suggested by an acclaimed investment newsletter.
#3 Withdrawing from your 401(k) or other retirement accounts early
Tapping into your retirement savings too soon can have several unwanted consequences. To start, you’ll have a smaller nest egg to live off during retirement, not only because of the withdrawn sum but also because of interests you will no longer generate on that sum. This will make it likelier for you to outlive your savings during retirement.
But aside from the real possibility of ending up broke in retirement, there is also an important financial reason to avoid making any early withdrawal that has an immediate effect. Withdrawing money from your 401(k) before turning 59 and a half comes with a 10% penalty fee, plus you’ll have to pay full income tax on the withdrawal. The net result is that you’ll end up with a lot less than what you intended to withdraw in the first place.
#4 Disregarding budgeting
One of the most important things to do if you want a financially secure retirement is to create a budget and stick to it. Budgeting will make it easier for you to know how much money you have at any given time and how much is going out of your account. The ability to track your finances on a daily basis will also help in case something unexpected happens, such as a car repair or emergency home repair.
Budgeting before retirement is the only real way to keep track of your money and make sure you’re heading in the right direction in terms of achieving your financial goals. Budgeting is especially important when you’re close to retirement since it can help you assess how far off you are from those goals and how to course-correct if necessary.
Not budgeting can potentially throw you way off track in a very short amount of time, so it’s something you need to be mindful of.
#5 Downsizing your home too early
Downsizing is one of the general pieces of advice I give most of my readers as a way to cut costs during retirement and boost your savings to generate more income.
Some people take this piece of advice as a way to justify selling their large, multi-bedroom home years before they retire. However, this may not be the best choice. Timing is very important when it comes to selling your home, and so is assessing the real estate market in your area before making a decision. You don’t want to sell your house when the housing market is going down since it could mean losing thousands of dollars you wouldn’t lose if you just waited.
Additionally, there are other good reasons to wait. A big home can generate plenty of income if you rent it out. You can then use this income to rent a new place in your target retirement community before actually buying. This will allow you to experience what living in the community is like before committing, plus you’ll probably be paying less rent than what you’re earning from your home, so you’ll also end up generating extra income that will beef up your retirement fund if you save it.
#6 Neglecting your health
Many of us do our best during our youth to look as best we can and take care of our body. However, people often stop exercising and taking good care of their health when they reach a certain age.
This is one of the worst mistakes you can make since health is a major issue during retirement. Most retirees spend over a quarter million dollars on healthcare during retirement, not including long-term care. While you can offset most or all of these expenses by buying long-term health insurance or by joining a CCRC when the time comes, the best way to avoid these expenses altogether is to keep as healthy as possible, in particular during your pre-retirement years.
#7 Taking Social Security Early
You can start cashing in your social security checks as early as age 62, but I wouldn’t recommend this unless you desperately need the money. Instead, you should hold off until the last possible moment (which comes at age 70) so that you can max out the benefits and receive the highest amount possible in every check.
The Bottom Line
Some of the biggest mistakes people make before they retire include spending their savings, taking out risky investments and withdrawing from their 401(k) early. To have a healthy and enjoyable retirement, it’s important to budget before you retire to know how much money is going in and out of your account.
You should also be mindful not to neglect your health since this will impact the amount of money spent on healthcare during retirement. Lastly, it’s best if you hold off cashing in Social Security checks until age 70 when possible so that you can max them out every time!
Avoiding some or all of these mistakes can make all the difference in the world once you retire.