For many of us retirement means the transition from the day-to-day grind of working to days of leisure, kicking back or puttering around and, best of all, no more schedules or alarm clocks.
The other important transition is from the final days of earning money through employment, to spending your money.
Even smart people can make financial mistakes when preparing for retirement whether they result from errors in judgment or fate. Unfortunately, there are often no do-overs.
Related: 16 habits that helped me retire wealthy
Despite their best intentions, retirees tend to make these same mistakes over and over again. Here are eight retirement mistakes to avoid:
Leaving work too early
Many people make the decision to retire too soon from a financial perspective. In many cases working just a few extra years can have significant impact on the quality of your retirement for the remainder of your life.
Early retirees also elect to take CPP as soon as they are eligible at age 60 with reduced benefits. If you can postpone applying for benefits, your payments will be higher.
Related: An easy way to estimate your CPP benefits
While many early retirees are extremely happy with their decision, unfortunately some are forced into retiring earlier than they might wish due to disability, health problems, or changes with their employer.
Not taking longevity into account
A 65-year-old man has a 40 percent chance of living to age 85; a woman has a 53 percent chance. Planning for a 20 – 30 year retirement is not unrealistic. Don’t underestimate medical expenses in the later years as well as long-term care costs.
Good preparation starts during your working career. Explore reasonable ways to cover future health care costs. Working past “normal” retirement age, or working part time can give savings a longer time to grow.
Related: What’s your retirement age?
Don’t be too conservative with your investments. It may make sense for you to separate your assets into pools and invest one pool a little more aggressively.
Withdrawing too much from your retirement accounts
A popular guideline is to withdraw 4 percent of your retirement savings annually. In the first phases of retirement many people tend to withdraw a lot more to fund a slightly more lavish lifestyle when they have so much free time to dive into hobbies, travel, and going out more.
Don’t sacrifice your future safety. Keep some funds set aside for the unknown. We can’t foresee all that could happen in the next 20 to 30 years, both financial disasters and life changing events.
Not having a tax-efficient retirement income distribution strategy
Another rule of thumb is to take your non-registered assets first to take advantage of continued tax deferment, but this may not always be the most advantageous.
Retirees are usually in a lower tax bracket, but retirement income comes from various sources that are taxed differently. Look at your “bucket” of money to determine the most tax-efficient way to withdraw based on your circumstances.
Get a realistic idea of your tax bracket and have a plan for the least amount of tax liability.
Don’t just focus on returns
Instead of fixating on investment returns, retirees should be looking at turning their assets into predictable income.
Related: Build a retirement income plan
Some retirees wanting portfolio income may move their money to high dividend yield stocks or give up liquidity with certain investments.
People wanting more security will want to buy an annuity while those wanting to keep their assets invested could follow the 4 percent rule. Be prepared to stick with it. Don’t over-react to bear markets or hang on to risky investments too long.
Supporting (or bailing out) adult children
Supporting adult children can make it difficult to replace the money when you need it the most – then they’ll be supporting you! Don’t be overly generous if it means possibly putting your own financial security at risk.
Putting education costs before retirement savings is a mistake. There are no financial aid and scholarship programs for retirement. Your children have their whole financial lives ahead of them – you do not.
Don’t be so overly concerned with leaving a legacy that you scrimp on living your best retirement life.
Failing to take control of your spending
When you retire some of your work and child related costs go down, but other expenses may go up.
Related: Why you should retire your debt before you retire
Pay off debt. Make a budget that outlines core expenses and desired discretionary spending. Include predictable expenses such as income taxes, and replacement and repairs to vehicles and homes. Make sure discretionary expenses don’t start creeping up by revisiting, and if necessary, revising your budget annually.
Retiring with no plan or investment strategy
You may miss out on investment opportunities and tax advantages. Avoid making short-term investment decisions. Acting on guidance from friends and family can be a mistake. They don’t have investment secrets, nor do they understand your entire financial situation.
Willingness to follow off-the-cuff advice increases vulnerability to financial scams. As you get older, the more chance of making unwise decisions. Likewise, create a solid estate plan.
Final thoughts
After taking so much time accumulating your assets it can be hard to switch your mind set to spending. Enjoy what you worked for your entire life.
