Retirement is a major milestone in life, one that generally requires a good deal of planning. Not everyone is fully prepared when the time comes to retire, though. Sometimes, retirees will make decisions that end up hurting their financial stability or make it harder to live the lifestyle they dream of.
GOBankingRates spoke with two financial planners, Curt Scott and Sean Williams, about the biggest budgeting mistakes they’ve seen people make upon retiring — and how to avoid them.
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Those who retire often think they’ll spend less money than they actually do. This could be for several reasons, such as no longer having a mortgage or car payment. But this isn’t always the case.
“The number one mistake I see people make when budgeting for retirement is assuming they will spend less money when they retire,” said Curt Scott, CFP, president and investment advisor representative at Scott Financial Group. “Because they have more free time, people tend to travel, shop, golf, eat out and increase other activities that cost money.”
Fortunately, there’s a relatively simple way to avoid this mistake, and that’s accounting for these possible expenses when planning out your budget.
“It’s important to remember that retirement turns your week into six Saturdays and a Sunday,” Scott said. “More money is spent on Saturday than any other day of the week.”
A fixed budget only goes so far in the face of inflation and other rising costs, but not everyone accounts for that.
“The biggest mistake that retired clients make in budgeting is assuming a fixed budget,” said Sean Williams, CFP, RICP and principal at Cadence Wealth Partners. “In a rising-cost environment, over a period of 20-30 years, this is a guaranteed recipe for failure. If there isn’t a plan in place to account for the fact that a $1 yogurt will cost $2.40 by the time they’re nearing the end of their lifetimes, they are simply on the slow road to destitution.”
The average annual rate of inflation — that is, the rising cost of everyday services and goods over time — was 2.9% for the 12 months ending in July. The cumulative inflation rate since 2014 is 32.51%, however.
To put this into perspective, $100 in 2014 would be worth about $133 today. Put another way, $100 dollars today has roughly 75% of the purchasing power as it did 10 years ago.
Another common budgeting mistake people make early in retirement is assuming they’ll spend about the same amount of money throughout their retirement years.
“A common mistake is taking a straight-line budgeting approach for retirement,” Scott said. “I find people spend more during the first five to 10 years after retirement when they are excited and have the energy and health to travel. Eventually, that excitement fades and they settle into a less expensive lifestyle in years 10 to 20 of retirement.”
Given this, it might be better to plan to spend more in the initial years of retirement — at least on interests, travel and the like. Don’t reduce your budget, however. Inflation can still eat away at your funds if you’re not careful.
While inflation can impact your money, many retirees use too high of an inflation factor.
“Inflation is an important issue and should be factored in, but I find many use an abnormally high inflation multiple,” Scott said. “There will be periods of high inflation, which we are seeing now, but that tends to revert to historical averages in time.”
So, what can retirees do to make sure their budgets align with their needs?
“When it comes to a budget, it is important to remember that when inflation really begins to look bad in a retirement analysis, usually between years 10 to 20, that is the time that spending starts to decline,” Scott said. “In this example, things may cost more, but you will be buying less and as a result, inflation may not have a major impact on the overall income need change when determining a budget.”
According to RetireGuide, Americans spend just over $475 billion on long-term care every year. Individuals spend anywhere from $35,000 to $108,000 a year.
Healthcare expenses in general, but especially long-term care, are hugely impactful for any budget, but many people don’t factor them in when retirement planning.
“These unexpected events (can we still call them that if 75% of retired couples will experience something like this?) are major causes of stress, foreclosure and Medicaid filings,” Williams said. “Speaking with a retirement planning professional or a long-term care planning expert can help retirees avoid this potentially devastating pitfall.”
Another early mistake people tend to make is that they don’t update their retirement savings allocation.
“There is a significant difference between the accumulation and distribution phases of a retirement savings account from an investment allocation standpoint,” Scott said. “While this isn’t directly budget-related, it can have a devastating impact on a budget if it is not properly addressed.”
Oftentimes, retirees whose incomes are heavily dependent on those withdrawals won’t factor in the risk that the accounts are exposed to or how the market can affect their portfolios.
“A major decline in value due to a market correlation will have a direct impact on the budget,” Scott said. “Continuing to [withdraw] at pre-correction levels could cause the account to liquidate quicker than planned. Withdrawals would need to be decreased in order to extend the time before complete account liquidation, lowering the amount available for budgeting purposes.”
If your retirement income depends on your investment accounts, as is often the case, be sure to assess the risk level of your account, particularly in regard to a market decline. And be sure to take action to minimize that risk and protect your investments.
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