While many people make financial mistakes throughout their lives, the impact of those mistakes increases with age. Millennials and people in Generation Z have much more time to learn from their mistakes and correct them. On the other hand, people who are retired or close to retirement don't have much room for course correction. Financial mistakes at this stage of life can have a negative impact on how they spend the rest of their days.
Following are nine financial mistakes retirees can't afford to make.
1. No financial plan and no budget
Retirement is a life-changing event that should be planned for strategically. "Retirees should have a plan for how to live and manage finances in retirement – and update that plan at least once a year", Advises Kevin Gallegos, vice president of Phoenix operations at Freedom Financial Network. Gallegos tells Investopedia this includes evaluating their assets and liabilities. And he recommends using one of the many retirement savings calculators available online to determine how much savings will be needed for retirement.
2. Pay yourself Second
At this stage in life, seniors who are no longer working need to consider their needs first. "Many retirees still give away too much of their own money to children and grandchildren", Says Jake Loescher, a financial advisor in Rockford, Illinois with Savant Capital Management. Loescher says this is an important and personal decision, but it often comes at the expense of their livelihood when retirees don't know how much they can afford to give to others. He tells Investopedia this situation is similar to a passenger on an airplane: put the oxygen mask on you before trying to help others.
3. Financing College
One of the ways retirees overextend themselves is to help their grandchildren go to college, but Josh Tschirgi, a financial advisor with Portland, Oregon-based Somerset Wealth Strategies, tells Investopedia that this can be a mess. their financial future. "If you have grandchildren, don't go overboard and significantly help fund their college education unless you are extremely wealthy", Tschirgi warns. With student financing available at favorable rates and college graduates having decades of working years ahead of them, Tschirgi says students have plenty of time to pay off their student loans.
4. Avoiding estate plans
It may be an uncomfortable topic, but retirees shouldn't avoid filling out basic estate documents. "Simple things like powers of attorney for health care and property are often" blank "and would be critical documents if a spouse becomes ill or unable to work,", Loescher says.In addition, he says these documents provide family members with instructions on how the deceased person's property should be distributed and managed. And this can reduce, if not eliminate, confusion and potential arguments among survivors.
5. Failure to purchase health insurance
Seniors aren't eligible for Medicare until age 65, and if they retire earlier, they'll have to buy health insurance, Tschirgi warns: "That's the worst mistake. If a retiree faces a major health problem, they could easily exhaust much of their portfolio. "
Tschirgi says many financial planners are commission-driven, so they will talk about stocks and bonds and sell them, but they stay clear of health insurance, but this is a critical part of financial planning. "So, for example, if you retire at 62 and lose your company-sponsored health insurance, you quickly discover that health insurance is costly and may not be a cost you had planned for. "Still, he advises retirees to bite the bullet and buy, especially since less expensive plans with high deductibles are available at the nation's health insurance exchange.
6. Failure to purchase long-term care insurance
It's another topic no one wants to think about, but retirees need to plan to be in a nursing home or require long-term nursing home care. Tschirgi says it can cost up to $9,000 a month to stay in a long-term setup: "It's not too late to buy LTC insurance if you can afford it by shortening the number of years. "However, if this is not financially achievable, Tschirgi recommends buying an annuity for nursing home Doppler. "These essentially double monthly annuity payments if you end up in a nursing home and cost little or nothing", says Tschirgi. While they don't cover everything, he says they provide financial relief.
7. Go overboard to try to be free
Sometimes retirees try to sell many of their retirement investments to eliminate debt. While this is a good cushion for cash flow, Loescher says it usually means all retirement assets are focused on things that can't be sold quickly to create income, like a house, car or other personal property. "A retiree should, of course, watch for distressed debt and pay off higher interest debt like credit cards, but be careful not to sell the farm and otherwise pay off cost- and tax-efficient debt like mortgages and home equity loans. ", Advises Loescher.
8. Lack of diversification
Many retirees forget the value of diversification, according to Lucas Casarez, a wealth planning assistant at Keystone Financial Services in Loveland, Colorado. "Whether it's a hot stock or a hot sector, things like this can wreak havoc on a portfolio. "When individuals get euphoric about recent successes, Casarez says they tend to over-allocate, and when that investment is no longer hot, they will be in trouble. "Lack of diversification can also occur when a person has more than 10% of investable assets tied up in their employer's portfolio."He says this happens when a retiree has spent a long time with an employer and doesn't want to let go of that employer's holdings.
And Loescher says that many pensioners are too conservative. This may feel good, but he says that what feels good doesn't always lead to long-term results. "Retirees can no longer live solely on bond or CD interest in retirement", warns Loescher. "To take a risk in diversified stocks, there must be a higher probability of not running out of money. "
9. Failure to see the big picture
Retirees can't afford to let political drama determine their financial decisions, according to Ken Weber, president of Weber Asset Management in Lake Success, NY "As the nation is increasingly divided politically, I'm seeing more older investors fearful of 'the way this country is going forward. "In fact, Weber says they tend to use those very words, and he can hear the fear in their voices.
However, Weber states, "Regardless of who is in the White House or who controls Congress, this is and always will be a capitalist economy, which means that any profit-driven business will always try to build the better mousetrap. "Weber says retirees should realize that permanent competition among businesses drives the economy, not temporary leaders in Washington. Once they understand this rock-solid concept, he says they can focus on a long-term financial plan, which usually means being invested in the U.S. stock market.
Another aspect of the financial picture is maintaining self-discipline. Tschirgi warns: "Some people who retire, especially if they have been careful, lifelong savers, mistakenly ask themselves what can be a dangerous question: Is this what life is all about? Sacrifice just to survive? "And then he says that some of them become Spendaholics. In just a few years, they ruin a financial plan they spent decades building.