Retirement is often a liberating period of life, it can also be a stressful one — especially from a financial standpoint.
The more careful you are with your money, though, the less stress you'll probably encounter.
Avoiding these pitfalls can help you rest easier and enjoy your retirement.
Not following a budget
Just as following a budget is important during your working years, so, too, is it crucial during retirement. In fact, in some ways it's even more critical to stick to a budget as a senior, since, at that stage of life, you might be limited to a fixed income. All you really need to do to budget properly is figure out what you're spending on monthly expenses and compare that figure to the money you have coming in from your savings, Social Security payments, and whatever other income sources you have available. If you find that you're spending more than what you initially planned on, you should think about cutting back on spending or working part-time to generate more income.
Forgetting about taxes
Many seniors make the mistake of thinking they're immune to taxes, but in reality, the same things you pay taxes on during your working years (think income and investment gains, to name a couple) are taxable in retirement as well. Unless you're housing your savings in a Roth IRA, the withdrawals you take from your retirement plan will be subject to taxes. The same is true for investments held in a traditional brokerage account that are sold at a profit. And the kicker: Your Social Security benefits may be taxable as well at both the federal and state levels. Understand what taxes you're liable for so you don't end up owing the IRS a whopping sum that you're unprepared to pay.
Neglecting your nest egg
You were probably told to keep tabs on your IRA or 401(k) investments during your working years to ensure that your money was growing adequately. Well, the same holds true in retirement — you still want your investments to be generating returns, which means you'll need to check up on them at least a few times a year to see how they're performing. If you're invested in a mutual fund or other investment products with relatively high fees, for example, with lackluster performance in recent years, it might be time to unload it.
Not taking your RMDs
The money you have sitting in a traditional IRA or 401(k) can't just stay put, enjoying its tax-advantaged treatment forever. At some point, you'll need to start taking required minimum distributions, or RMDs, from your account. The amount of those withdrawals will depend on your account balance and life expectancy, but know this: If you fail to take your RMDs on schedule, you'll face a 50% tax penalty on any amount you fail to withdraw from your account on time. If you turned 70 ½ in 2019 or prior, you are subject to the “old” rules and the process of taking RMDs has already started for you. For anyone younger, the Secure Act passed last year put into effect a new rule which says your first RMD will be due by April 1 of the year following your 72nd birthday. This year, given the pandemic, is of course a bit different. And be sure to keep in mind that your RMD, like any other traditional IRA or 401(k) withdrawal, will be subject to taxes, so be sure to plan for that expense as well.
The more financially savvy you are during retirement, the more a rewarding period it's apt to be. So be sure to follow a budget, do some tax planning, keep up with your investments, and pay attention to RMDs. Doing these things could help you enjoy your golden years to the fullest and avoid money troubles later in life.