If you’ve been saving for retirement, you know how difficult it can be to set aside money for your future. But protecting your finances doesn’t end when you reach retirement age.
Your lifestyle may change, but it’s still important to take care of your financial security. Knowing which moves to make now could help you have a stable situation down the road. Here are nine common money mistakes by seniors to avoid before and during retirement.
1. Claiming Social Security too early
Social Security retirement benefits include receiving a monthly check once you’re at least 62 years old. The amount you’re entitled to receive each month depends on multiple factors, including the age you start receiving Social Security benefits. But if you start when you’re 62, you could be leaving money on the table.
Waiting until your full retirement age, which depends on your date of birth, could qualify you for additional benefits. You’ll get your full Social Security benefits at your retirement age, but waiting until you’re 70 might get you even more benefits.
It depends on your situation, but it could make sense to wait and receive the full benefits. This may increase your monthly income and could help you cover necessary expenses during retirement.
2. Failing to enroll in Medicare
Medicare is the federal government’s health insurance program. It’s specifically designed for people who are 65 years or older, though other groups of people could potentially receive benefits as well. Getting your Medicare insurance squared away is an important part of retirement planning. You’re likely to stop working when you retire, which will end your job-sponsored health insurance.
So it’s best to be ready to enroll for Medicare when the enrollment period begins. The initial enrollment period typically lasts seven months, beginning three months before you turn 65 and ending three months after you turn 65. If you don’t enroll during the initial enrollment period and want to enroll later, you could be subject to a late enrollment penalty. This penalty increases the longer you wait to enroll.
To help avoid Medicare fees, review the Medicare offerings and be ready to make a decision well before you turn 65 years old. Otherwise, you might delay during the enrollment period and could end up with unnecessary health insurance fees during retirement.
3. Not planning for additional health care costs
Health care costs are high in and around retirement age, which means you need to be financially prepared to cover these expenses. Qualifying for health insurance through Medicare is helpful, but it could still be important to have additional funds set aside for what your plan won’t cover. This is where investing money in a health savings account could be useful.
HSA funds can be used only for qualified medical expenses, which makes them a great option for retirees. If you consistently set aside pre-tax money in an HSA, it could be easier to have available funds when you need them for medical expenses later in life.
HSA withdrawals aren’t taxed as long as they’re used for qualified medical expenses. This could be deductibles, copayments, and other eligible expenses, but it wouldn’t typically cover premiums.
4. Failing to budget
If you don’t have a sound budget in place years before starting retirement, you might not have the funds you need to live how you want. This may include having extra money to travel, visit family, and owning a second home. You might think you have enough money to do all these things, but budgeting can help you make sure your finances are sound.
In many cases, budgeting is an act of saving money now so you can enjoy what it buys later. If you want to travel at least once a month during retirement, what kind of money do you need to put away right now? Do you know how much you currently spend each month and what your biggest expenses are?
If you track your spending, it’s easy to see hard figures. This could help you translate your finances into something more understandable and set achievable retirement goals.
5. Underestimating retirement costs
Estimating your retirement costs goes hand-in-hand with creating a budget for retirement. Starting with a budget can help you know how much money you need to include in your estimates. If you don’t correctly estimate how much money you need in retirement, you might end up with less money than you thought you needed, and scrambling to live the retirement life you want on the funds you have left.
To avoid this costly retirement mistake, remember to ask yourself the right questions during your preparations. What are your retirement expenses? How much are they going to cost?
If you can narrow down each expense as far as possible, you’ll get as close as you can to correctly estimating retirement costs. It’s important to remember every possible expense so you can include everything in your budget. When you think your estimations are ready, consider adding more funds as a buffer to account for the unexpected.
6. Forgetting to take required minimum distributions on time
Required minimum distributions are in place with certain accounts so you can’t hold onto your retirement funds forever. You typically have to start taking withdrawals from certain retirement accounts by age 70 1/2, though people who turned 70 on July 1, 2019, or later can wait to take withdrawals until they’re 72 years old. RMDs apply to most retirement plans, including traditional individual retirement accounts, SEP IRAs, SIMPLE IRAs, 401(k) plans, and more.
If you don’t start taking the required distributions or you don’t take the minimum required amount, you might have to pay a penalty. The penalty could be a 50% excise tax on the amount you were required to distribute. To avoid losing the money you’ve been saving up, remember to start taking required minimum distributions when you’re supposed to.
7. Failing to downsize
The family home you still own might be the house your children grew up in and your grandchildren love to visit. But does it make sense for your retirement plans? Having a large home when you have a family is reasonable, but it may become unnecessary once you reach retirement age.
Consider the size of your home, its location, and how much the upkeep costs. Do you live in an area with high property taxes? Is it difficult (and costly) to keep your house maintained when it’s only you or you and your partner living there?
If you can save money by downsizing your home, it could be something to think about. Your potential savings from getting a smaller home and/or moving elsewhere can help pad your retirement fund.
8. Putting off estate planning
Estate planning can seem overwhelming because of the time, effort, and money it takes to get everything right. But think about what would happen if you didn’t do any estate planning. Your assets would likely up in the air if you died or were incapacitated. This could potentially cause a financial disaster for your loved ones, including your partner or children.
To avoid having a probate court handle your estate, it might make sense to get your affairs in order well before you ever think you need to. As your situation changes, update any applicable documents involved in your estate. Planning in this way can help you minimize estate taxes and have your assets assigned as you wish.
9. Failing to talk to your children about your plans
Failing to communicate to your children about estate planning and relevant retirement information can cause unnecessary consequences if you were to die. Although death and money aren’t subjects you might typically want to discuss with other people, it’s important your family knows what your plans are.
Your children may have to take on certain roles and responsibilities if you die or get sick, including becoming the executor of your will or a health care proxy. Talking through what that means with them might be difficult, but it will help everyone feel more prepared. In addition, it could help square away what happens with your finances after you die. This is a big step toward making sure everything and everyone is taken care of according to your wishes.
The bottom line
Knowing how to manage your money before and during retirement is essential to having the retirement life you want. It will likely take lots of planning and hard work, including budgeting and tough conversations, but the results can speak for themselves. Remember it’s never too early or too late to plan for retirement or start saving for your financial goals. Making decisions to prepare for retirement now will pay off in the future.
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