As a retiree, making prudent financial choices can help ensure your continued financial security. Unfortunately, there are some mistakes that could undermine your efforts and make it more likely you'll find yourself running short of money in your later years.
The good news is you can easily avoid these costly errors if you're aware of the potential problems they could create. Here are four key things the majority of retirees should be sure to steer clear of if they want to avert a future financial disaster.
1. Go without supplemental Medicare coverage
Medicare provides insurance for seniors, but coverage isn't nearly as comprehensive as most people would think.
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In addition to coverage exclusions for common medical needs such as hearing aids, Medicare also has high coinsurance costs. Specifically, with Medicare Part B -- which covers most outpatient care -- you'll have to pay 20% of your expenses. This can add up to a small fortune if you're visiting the doctor often. And there's no out-of-pocket limit on your coinsurance costs.
You don't want to take a chance of getting stuck with thousands of dollars in surprise medical expenses. To make sure that doesn't happen, consider buying either a Medigap policy to supplement traditional Medicare coverage or signing up for a Medicare Advantage Plan.
2. Take on high-interest consumer debt for discretionary spending
Borrowing via a credit card, payday loans, or even a personal loan can be a big mistake as a senior. That's because you're doing two things when you borrow: Raising the costs of your purchases by paying interest and committing your future self to a monthly expense as you pay back your debt. Neither of these is a good thing to do when you're on a fixed income.
If you make your costs higher by adding interest charges to your purchases, you'll have to spend more of your Social Security money or retirement account withdrawals for whatever you're buying. And when you commit your future self to big monthly bills, you'll have less money available in the future to cover your basic needs.
Unless you have no other options at all and must make a purchase you have to borrow for, just say "no" to consumer debt as a senior. Instead, aim to save up for your purchases over time by living on a budget and setting aside money for big expenditures.
3. Put too much money into high-risk investments
As a senior, you need to earn a reasonable rate of return on your money so that you don't drain your account balances too quickly. But you also need to adjust your risk tolerance to account for the fact you have less time to recover from losses and may not easily be able to rebuild after a devastating market crash since you can't always just go back to work and invest more. That means you need to limit the amount of money you put into riskier investments.
Unless you have ample spare cash, steer clear entirely of speculative investments where there's a reasonable likelihood you could lose a lot of your money and never get it back -- even if such investments come with the potential for big gains.
You'll also need to take more calculated risks when it comes to the stock market. You don't want to stop investing. After all, the stock market has historically provided the best balance between risk and reward of any investments over a long time horizon. But you should have some of your portfolio out of the market so you aren't forced to sell at a loss during a downturn to cover your immediate costs when you're depending on your retirement investments for income.
And unless you're skilled at picking stocks and willing to put in the time to do it right, you may want to opt for index funds, which could be safer than putting your assets into shares of individual companies, even though your potential returns are more limited with these funds.
4. Withdraw money from retirement accounts without having a plan
Finally, you'll want to avoid draining your retirement nest egg by making withdrawals too quickly -- which means you should decide on a safe withdrawal rate that works for you. There are lots of options, including following the 4% rule or another percentage-based rule where you take out a small percent of your account balance each year. Before you take out any money, pick one that makes sense for you and that you believe will allow your money to last as long as you need it.
