Bill Losey, CFP, owner of Bill Losey Retirement Solutions, LLC, an independent, fee-only registered investment-advisory firm, Greenwich, New York. He is author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional. BillLosey.com
Despite years of planning, retirement can bring many surprises. Along with the excitement and freedom that come from ending a long career, you also might experience snags as you adapt to your new life. You can work them out. But even financial mistakes early in your retirement can be very difficult—or even impossible—to recover from, and they can jeopardize your long-term financial security. Many retirees make these money mistakes—but you don’t have to! Keep your retirement on track by avoiding these common mistakes of new retirees…
• First-year spike in spending. You might assume that you will spend less when you retire, but in reality, nearly half of retirees spend more in the first years of retirement than they did when working. Reason: With more free time on their hands and all their retirement savings at their disposal, new retirees feel emboldened to spend more on hobbies, dining out, travel and other activities. That’s understandable. But overly exuberant spending can deplete your savings much more severely than you might imagine—because every dollar you spend early in retirement represents multiple future dollars that you would have earned from investing that money instead.
What to do: You don’t have to live beneath your means, but you should develop a sensible retirement budget with a financial adviser before you retire. Sticking to these spending guidelines can help keep your retirement on track for years to come. And it’s fine to allow for some splurging early in retirement—if you and your adviser plan for it and you save a little extra for those first years of fun.
• Underestimating the cost of relocating. Retiring to a home on the beach or other major move is part of many people’s retirement dreams. But while some of the costs of moving—such as buying a house or apartment and hiring a moving company—may be obvious, others can sneak up on you. Variables such as local taxes and homeowner’s insurance rates can make your new location a lot more expensive than you expected. Example: Homeowner’s insurance in Florida costs nearly twice the national average.
What to do: Before deciding to move, research your potential new locale carefully. Compare local taxes and typical costs of living with what you’re used to paying. You can find data to make these comparisons at websites such as BestPlaces.net or RetirementLiving.com.
• No long-term-care insurance. You might have been content to hold only life insurance and disability insurance during your working years. But upon retirement, you realize that you now need insurance to cover the costs of a potentially debilitating illness—costs that might include in-home care or an extended stay in a nursing home. Trouble is, your options now are limited. Long-term-care insurance gets more expensive—dramatically so—as you age. Example: A policy purchased jointly by a couple, both at age 55, costs an average of $2,466 annually. In contrast, if they wait until they are both age 60 to buy a policy, they pay an average of $3,381 annually. Worse, you can be rejected for long-term-care insurance altogether if you have a disqualifying medical condition—and the chance of that increases as you age.
What to do: Buy long-term-care insurance as early as possible, even in your late 40s or in your 50s. If you are not keen on the idea of paying premiums for decades, you can consider a policy for which you pay a higher premium for a set amount of time early in the contract and then no premium after that. That way, you could buy a long-term-care policy and pay premiums while you’re younger and still working—essentially prepaying for insurance you may need during retirement.
If you’re in your 60s and in good health, purchasing a long-term-care policy may be more expensive but likely worth it to protect your other financial assets. If you apply but are rejected by more than one carrier, work with a financial adviser to examine other options, such as annuities that have long-term-care riders. (Alternative long-term-care coverage options often are complicated, and the best approach will depend on your unique circumstances.)
• Getting divorced in retirement. Early retirement is a time of transition that can be rocky for couples. Spouses sometimes struggle to adapt their relationships to a new reality in which their careers are over and they are spending more time together. But a divorce, even if it is warranted, is expensive. The legal fees for a divorce without minor children average $12,500 and easily can cost many tens of thousands more. Worse, once assets are divided, what had been enough money to support a couple through retirement may not support two individuals leading separate lives. This financial strain can set your retirement plans back by 10 years or more.
What to do: Consider staying married but living apart. You still will have to face some duplicate expenses—such as covering housing costs in two locations—but your retirement assets may take less of a hit than the full cost of a divorce.
• Being house-rich and cash-poor. For many retirees, a home is one of their most important assets. In fact, many people retire with more equity in their homes than cash and investments in their retirement savings. But this situation might not be ideal if it means that you don’t have enough income to afford the lifestyle you dreamed about. And waiting too long to remedy the problem is even worse because a large house can rapidly drain your savings due to expenses such as taxes and upkeep.
What to do: If you have more equity in your home than the value of your investment assets, consider downsizing to a smaller home and/or moving to a cheaper locale. However, be sure to conduct sufficient research about the potential costs of that move, as explained above.
Alternatively, a reverse mortgage—which taps the equity in your home to give you cash payments and typically doesn’t need to be paid back until you move permanently, sell your home or die—is a good choice for some people. Example: If you don’t plan on moving and don’t want to bequeath your home to any heirs, a reverse mortgage may work for you. Before deciding on a reverse mortgage, work with a financial adviser to explore your options.
• Still supporting adult kids. Helping out your adult kids by paying a few bills for them or providing regular cash gifts might not have been a big deal while you were working and earning money. But as a new retiree, you no longer have steady income from a job—and each dollar you provide to your children is one less you will have to support yourself through what can be a long retirement.
What to do: Cutting off financial support for your kids is difficult, but you don’t have to do it all at once. You can establish a time frame with them for when you will stop providing the regular support that they may be used to and then gradually reduce the amount you give them. If you must turn down requests for large amounts of money, such as a child asking for help with a down payment on a house, remind your children that spending too much early in your retirement could cause you to outlive your savings and that you don’t want to be a financial burden on them as you reach old age.