In retirement, it's more important than ever to be careful about your money. After all, going back to work to earn extra income probably isn't easy or attractive. And you don't want to be broke in your 70s and 80s, especially as healthcare costs often go up around this time.
If you want to make sure your cash lasts and that you don't face serious financial struggles as a senior, there are a few mistakes you simply cannot afford to make. Here are three big errors to avoid so you don't put your financial security at risk.
1. Withdrawing too much too soon
Spending in retirement tends to follow a predictable pattern. Most people retire and spend a lot during their early years, likely because of expenditures on travel or fun activities you've freed up time to enjoy. As you get older and start to feel your age, however, spending tends to decline for a few years. Sadly, though, health problems tend to increase later in life -- and spending increases as you cover medical care costs and perhaps even pay for long-term care.
The problem is, if you indulge your whims too much during the first heady years of retirement, you could be broke by the time you hit those later years. You don't want to have too little money to pay for the healthcare you need because you've spent down your savings -- so you'll need to make responsible choices early in retirement.
Don't assume you can just follow the 4% rule, either. The 4% rule is based off the conventional wisdom that you can withdraw 4% from retirement accounts in your first year of retirement, increase withdrawals by inflation each year, and never run out of cash. Research has shown, however, that the 4% rule doesn't work in a time with lower bond yields and longer life spans -- and chances are good you'll run out of money if you follow it.
There are other approaches, including a recommendation from the Center for Retirement Research to base withdrawals on Required Minimum Distribution tables prepared by the IRS. Or, if you want to be as safe as possible, commit to leaving the principal alone and living on interest combined with Social Security -- but you'll have a lot less income if you use this method.
Whatever approach you opt for, be absolutely certain you're conservative in how much you withdraw and that you keep an eye on investment accounts to ensure they'll be able to provide sufficient income for your later retirement years.
2. Living without an emergency fund
Too many retirees feel the time for saving cash is over, and it's now time to spend. After all, you've probably spent decades squirreling away cash in a 401(k) or IRA, and now you want to simply enjoy the fruits of your labor.
Unfortunately, the need to save money doesn't end when you become a senior -- and you especially should maintain an emergency fund. Emergency funds are designed to cover unexpected surprises or to pay living expenses if you suddenly don't have income coming in for a while. Since seniors usually get money from Social Security, which is a guaranteed source of income, you probably don't need as large an emergency fund as younger people who depend on a paycheck. But unexpected surprises still crop up -- and surprise healthcare spending is much more likely in your later years. You may also incur big car- or home-repair costs or may have to help your kids out in an emergency.
You don't want to be stuck relying on debt or withdrawing too much at one time from a retirement investment account to cover unexpected costs that inevitably arise, so make it a point to have at least a few thousand dollars accessible in savings. If you spend this money on an emergency, replenish your account ASAP, as you never want to be caught without the cash you need.
3. Taking on more consumer debt
Borrowing as a senior is a major financial faux pas. When you're living on a fixed income from Social Security and your retirement savings, the last thing you need to do is to send a portion of your hard-earned money to creditors every single month.
Interest on consumer debt such as credit cards can be extremely expensive, and it can be hard to pay more than the minimum without drawing down your savings too quickly. If you take on debt, you could be stuck owing for years -- and part of your Social Security or investment income will have to go toward servicing this debt. This increases the chances you'll run out of money too early, as you have to withdraw more to maintain the same standard of living while also covering interest.
The goal should always be to pay off your debt, including your mortgage, before you reach retirement. Once you've retired, budget for the things you need and save up for big purchases so you can avoid reducing your spending power by paying interest.
Don't make these mistakes as a retiree
Getting into debt, having no financial cushion, and drawing down your savings too fast can lead to disaster after you've left the working world for good. Protect your investments to make sure you have the money to enjoy retirement now and to pay for essential healthcare services if your health declines as a natural part of the aging process. By avoiding these three mistakes, you'll have a much better chance of living comfortably even into your 80s or 90s.