Financial Mistakes You Might Be Making

These Mistakes Could Destroy Your Retirement

Written by Brittany Stepniak
Posted June 26, 2013

The culture of this country is built around consumption and spending. This can be seen everywhere one turns, with continued increases in the amount of consumer debt and declining savings rates.

Even the measurements for economic health put out by the government tend to use the amount of consumption as a barometer. We are continually encouraged to spend (and even make poor financial decisions), especially during periods of economic difficulties.

retirement mar 8When the economic downturn of 2008 arrived, many people felt like they were hit right between the eyes. Relying on the continued rise in home values no longer worked, and many people were forced to take a hard look at their financial misdeeds or mistakes of the past.

Two of the groups hit the hardest were those who are currently retired and the baby boomers, who might still have some time before they stop working and retire. Baby boomers, or those born between the years 1946 and 1964, are beginning to see that the new economic realities might be different than they had expected.

The economic issues of the past few years have hit this group quite hard, and many are now looking back and thinking about some of the financial mistakes they may have made.

If everything happened in a vacuum, we would all be able to plan our ideal retirement. Not only this, but we would also start saving from the minute we entered the work force. The overall goal of retirement is to be able to live the way we want and simply enjoy ourselves.

Sadly, there are still a number of mistakes that are commonly made before – or even during – retirement.

1. Making incorrect assumptions

This one can have a dramatic impact. Many people handle their retirement planning without giving much thought to the age at which they will stop working. While we might like to retire at 65 or 63 or 70, or whatever...the reality is that we simply cannot reliably predict the future.

This can be especially problematic for those who really need a few more years of work in order to save extra money or pay down some bills. Health issues may also force retirement to come sooner than one would like.

Obviously, you want to start planning and saving as soon as possible. Pay down as much debt as you can, and do this sooner rather than later. See if you can develop a source of income on the side, such as consulting or coaching. Use those years of experience to your benefit.

2. Excessive and frivolous spending

This might not seem like a big deal when it is being done, and to be sure, this happens at all ages. However, continuing to spend like a 20-year-old during retirement can be a financial killer.

Whatever amount of money you have managed to save needs to last for the rest of your life – and remember, in retirement this could be another 30 or 35 years. So budget wisely, and avoid unnecessarily spending money that could remain invested and working towards continuing to secure your retirement.

3. Refusing to update financial plans

As we have seen over the last couple of years, situations change. Sometimes the shifts in the financial markets and the economy can be dramatic. As conditions change, it is also important to re-evaluate your own financial plan.

This often leads to the common mistake of taking a cookie cutter approach to retirement planning and investing. Many retirees assume that since they have now reached their “golden years” they should just dump all of the stocks and other “risky” investments in their portfolios in favor of bonds, CDs, and other safe instruments. This is old advice that may not work for the current economic and financial realities.

Instead, consider sitting down with a professional adviser. He or she can take a look at your retirement finances and make specific recommendations that will likely be more on target for your situation than relying on old and worn out clichés or advice.

4. Dipping into retirement savings

This is one of the worst mistakes a baby boomer can make. By taking money out of a tax advantaged account (most retirement savings accumulate tax free), you not only lose this money directly but also any interest and capital appreciation from that money.

In other words, $1,000 taken from an IRA today might have turned into $15,000 in twenty years. This is the power of compounding. You must do everything in your power to avoid this because it is directly stealing from your future.

That seemingly small amount today could provide you with enough to live on for several months, or even a year, in retirement. Find another way to come up with the needed funds, or simply avoid extra expenditures.

 

5. Living on borrowed money

This is another killer. Sadly, many baby boomers have been making this mistake for years. After all, the current culture continues to perpetuate the lie that people need to live beyond their means, borrow as much as they can, and then worry about paying for everything later.

The problem is a day of reckoning will come. If a baby boomer continues to remain in debt to the hilt with car payments, mortgages, and other obligations, it could become very difficult to save enough for a good retirement.

If this represent your current situation, there is still hope. Begin paying down debt wherever possible, stop making any new debt, and evaluate your situation. This may also involve the reality of pushing back your retirement date by a few years.

6. Treating home equity like a piggy bank

Many boomers had been suffering from the illusion that home prices and valuations would continue rising indefinitely. After 2008, this view came crashing down.

The idea of treating the equity in your home like a bank, borrowing against it every couple of years and pulling money out, is never a sound financial strategy. Remember that every penny you take from a secure investment or way of saving money (especially in a tax advantaged vehicle like real estate) is money that you are literally stealing from your future.

Start a plan today to pay down your mortgage(s) as soon as possible. Ideally, this should be completed before entering retirement.

7. Not saving more money

It is likely that all baby boomers will at some point examine their situations and ask themselves why they simply did not save more money. Of course, you cannot go back in time to correct this, but you can save more from today on.

There are types of retirement plans and vehicles (especially IRAs) that allow what is known as “catch-up” contributions. Look into these rules and then start saving as much as you can.

You may also decide to move your retirement date into the future in an effort to maintain your current level of earnings while increasing your savings. Reduce whatever debt is possible, and begin to consider re-framing your retirement goals and ideas to a more realistic picture.

 

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