Though retirement is often a liberating period of life, it can also be a stressful one — especially from a financial standpoint. The more careful you are with your money, however, the less stress you’ll encounter. And that’s why you’ll need to avoid the following mistakes at all costs.
1. Not following a budget
Just as following a budget is important during your working years, so too is it crucial during retirement. In fact, in some ways it’s even more critical to stick to a budget as a senior, since, at that stage of life, you might be limited to a fixed income. All you really need to do to budget properly is figure out what you’re spending on monthly expenses and compare that figure to the money you have coming in from your savings, Social Security payments, and whatever other income sources you have available. If you find that you’re spending more than what you initially planned on, you’ll need to think about cutting corners or working part-time to generate more income.
2. Forgetting about taxes
Many seniors make the mistake of thinking they’re immune to taxes, but in reality, the same things you pay taxes on during your working years (think income and investment gains, to name a couple) are taxable in retirement as well. Unless you’re housing your savings in a Roth IRA or 401(k), the withdrawals you take from your retirement plan will be subject to taxes. The same is true for investments held in a traditional brokerage account that are sold at a profit. And the kicker: Your Social Security benefits may be taxable as well at both the federal and state level. Understand what taxes you’re liable for so you don’t end up owing the IRS a whopping sum that you’re unprepared to pay.
3. Neglecting your retirement plan
You were probably told to keep tabs on your IRA or 401(k) investments during your working years to ensure that your money was growing adequately. Well, the same holds true when you’re in retirement — you still want your investments to be generating returns, which means you’ll need to check up on them a few times a year to see how well they’re performing. If you’re invested in a mutual fund with high fees, for example, that’s been losing money in recent years, it might pay to unload it in favor of a lower-cost, better-performing fund.
4. Not taking your RMDs
The money you have sitting in a traditional IRA or 401(k) can’t just stay put enjoying its tax-advantaged treatment forever. At some point, you’ll need to start taking required minimum distributions, or RMDs, from your account. The amount of those withdrawals will depend on your account balance and life expectancy, but know this: If you fail to take your RMDs on schedule, you’ll face a 50% tax penalty on any amount you fail to withdraw from your account on time. If you turned or are turning 70 1/2 at any point in 2018, your first RMD will be due by April 1, 2019. Keep in mind that your RMD, like any other traditional IRA or 401(k) withdrawal, will be subject to taxes, so be sure to plan for that expense as well.
The more financially savvy you are during retirement, the more a rewarding period it’s apt to be. So be sure to follow a budget, do some tax planning, keep up with your investments, and pay attention to RMDs. Doing these things will help you enjoy your golden years to the fullest and avoid money troubles later in life.