Saving for retirement takes a lot of effort, patience, planning and discipline. Once you’ve accumulated a sufficient nest egg to last through your golden years, it may be tempting to rest easy and not pay as much attention to your money habits.
But being financially diligent is just as vital after you’ve stopped working. Following are a few financial mistakes to try and avoid during retirement:
1. Moving all assets out of the stock market and into “safe” investments
While it’s smart to take a more conservative approach with your money after retirement, I recommend always investing a portion of your money in funds that can continue growing your income. High-quality dividend stocks are a good example of such assets. Talk with a financial professional about what percentage of your portfolio you should put in stocks depending on your age.
Following are some issues with putting all your money in “safe” investments like bonds:
- As interest rates rise, bond prices tend to plummet. It may not seem like a problem if you don’t plan on selling your bonds anytime soon. But if financial needs arise and you need to liquidate some of your investments, you could lose a significant portion of that income.
- Bonds fail to assist your portfolio with the affects of inflation. They may provide you with a consistent income stream, but your principle balance will stay the same. Therefore, you may be forced to sell other investments to take care of your basic needs as living costs increase.
2. Making “big ticket” purchases too soon
Retirement provides a lot of opportunities for you to finally do the things you’ve been wanting to do and go to the places you’ve been wanting to go.
But make sure you look before you leap into major investments. Acting on your dreams too quickly—such as purchasing a second home or boat you can’t really afford—can put a harmful dent in your hard-earned retirement savings.
To avoid this situation, consider renting first. That way you can find out whether you’re really going to use that fancy recreational vehicle or other residence halfway across the country. Taking the plunge into ownership is a serious cost and time commitment when you consider maintenance and repairs. Renting before buying gives you a chance to decide whether your dream purchases are really worth it.
3. Failing to research the most tax-friendly ways to access your savings
When you have a combination of 401(k)s, Roth IRAs and traditional IRAs to draw from in retirement, it can be confusing to decide which account to access first in order to optimize your savings and make them last.
While everyone’s situation is different, there are a few factors all retirees should consider:
- When you reach age 70 1/2, you’ll have to take required minimum distributions from your traditional IRA and 401(k) accounts. That money will be considered taxable income, and your increased adjusted gross income could put you over the threshold for taxing your Social Security income.
- Roth IRA funds can be accessed with no tax consequences. Work with a financial professional to take a balanced approach so you can take advantage of all the tax breaks available.
- You have control over when you pay taxes on long-held stocks with big capital gains. Don’t hesitate to ask for help with timing the sales of your stocks in order to reduce tax liability.