When you’re about to retire, you’ll want to start making most of your financial decisions with your retirement in mind. As you get closer and closer to your retirement date, you’ll want to contribute all you can to your retirement savings accounts. You’ll also want to prepare for any expenses you may incur during your retirement. In the weeks and months before you retire, it’s important to be very careful with your financial decisions. If you make too many wrong decisions, you could potentially have a lot less money available to use in your golden years.
If you’re getting ready to retire very soon, here are nine financial mistakes that you should try your hardest to avoid making.
1) Early Withdrawal from Retirement Savings
Many people make the mistake of withdrawing money too early from their retirement savings accounts.
Doing this will naturally result in you having much less money to spend while you retire. You may also get penalties for withdrawing money too early. If you withdraw money from your 401(k) before you’re 59½, you may be subject to a 10 percent early distribution penalty tax. You’ll also have to pay income tax on the amount you withdrew. Many people choose to cash out their 401(k) when they change jobs, but this could result in you losing a lot of money each month when you retire. Instead of cashing out, roll over the funds to your new employer’s 401(k). Or, if that isn’t an option, put the funds in your own savings account. This way, you’ll have plenty of funds waiting in your account when you retire.
2) Not Preparing for Healthcare Expenses
As you’re planning out your retirement budget, be sure to plan for potential healthcare expenses. According to Fidelity Healthcare, a retired couple will spend an average of $260,000 out-of-pocket for healthcare expenses.
If you don’t plan for these expenses, your savings could quickly be wiped out. To save money for healthcare expenses, it’s a good idea to open a Health Savings Account (HSA). To open this account, you have to have a High Deductible Health Plan, which is generally any plan that has a deductible of $1,350 or more for an individual or $2,500 or more for a family. If you qualify, you can contribute up to $3,400 a year for an individual HDHP or up to $6,750 for a family HDHP. When you save money specifically for healthcare-related expenses, you won’t have to worry about having to spend your entire nest egg on healthcare costs.
3) Not Saving Enough
Another common mistake people make is not putting enough money away for their retirement. When you’re saving money for retirement, start as early as you can and save as much as you can every month.
Generally, most financial advisors say to try and put about 10 percent of your income away each month. If you start early, this could save you a ton of money in the long run. If you can, put at least 10 percent of your income into your retirement savings account, and don’t touch this money until the day you retire. Even if you can’t afford to put away 10 percent every month, you’ll still want to save as much as possible. After all, nobody ever complains about having saved too much money for retirement.
4) Risky Investment Portfolio
As you near retirement age, many financial advisors suggest reassessing your investment portfolio. While having risky investments with high rewards is okay when you’re younger,
generally it’s not a good idea to have a portfolio that’s too risky when you’re about to retire. You don’t want to risk losing a lot of money on an investment right before you retire. If this happens, you may have to delay your retirement. If you’re getting close to retiring, meet with a financial advisor and have them assess the risks in your portfolio. Ask your advisor to give you some low-risk options and focus on those investments in the months before you retire. This way, you’ll be able to earn some money from your investments, and you won’t have to worry about losing your retirement nest egg.
5) Assuming You Can Live on Social Security Only
Many people plan to live on Social Security when they hit retirement. While this is enough money for some people to live on, for others it won’t be enough.
According to The Motley Fool, the average Social Security retirement benefit is $16,000 a year, or about $1,360 a month. The maximum benefit that retirees receive at their retirement age is $2,639 a month, or $32,000 annually. If you don’t think that this will be enough money for you to live on comfortably, start planning other ways to generate income during your retirement. You could get more income by working a small part-time job, or by investing in dividend-paying stocks. If you are still thinking of using Social Security as your sole income, try creating a mock-budget before you retire. This will show you if Social Security will be enough for you.
6) Avoiding the “Money Talk” with your Adult Children
If you help out your adult children financially, you’re not alone. According to a 2015 Pew Research study, 61 percent of parents with adult children helped out their kids financially in the previous 12 months.
When you’re working, providing your kids with some money, every once in a while, probably doesn’t seem like too big a deal. However, once you hit retirement and move onto a fixed income, regularly providing your kids with money could become a much bigger burden. Before you retire, it’s a good idea to talk to your kids about money. Let them know that you’ll always be there for them, but you can’t keep supporting them financially as you enter retirement. This conversation is tough to have, but it’s necessary for both you and your children.