Top 8 Money Traps in Retirement

 

A successful retirement doesn’t mean that you make perfect money decisions along the way. Everyone makes money mistakes at some point in life. However, you do want to avoid the big, costly mistakes that could wreck your financial security. Today, we’re counting down the top eight money traps in retirement.

8. Getting Scammed

Sadly, many people fall prey to scammers every year – and it’s not just retirees who are the victims. However, retirement does open the window for con men to exploit people in different ways. Whether it’s identity theft, Medicare scams, credit card skimming, or email phishing, the digital age requires us to be more diligent to protect our finances.

The best way to avoid being scammed is to slow down, follow your intuition, and never give out any personal information. If you’re called, emailed, or texted with a request for money or sensitive information, stop and be curious. Is there any chance they could be someone other than who they claim to be? Only after you’ve hung up the phone and independently confirmed everything’s legitimate should you proceed.

If you’ve been scammed, don’t beat yourself up over it. Some of these scammers can be frighteningly intelligent and convincing. However, it’s one of the money traps you can certainly recover from, which is why I’m placing it at #8 on the list.

7. Being Overly Charitable

Charity is a virtue, but it can also be taken too far. As we age, it’s natural to consider our legacies and cultivate our desire to make the world a better place for future generations. Many retirees are out there quietly making an impact in their communities.

However, in excess, charity can turn from a virtue into a vice. This desire to be charitable has been famously exploited by tele-evangelists over the years. I grew up one town over from Jim and Tammy Faye Baker’s PTL empire, so I’ve seen this in action.

There are many folks out there who tithe – but what does this look like in retirement? Once you’re living off your investments, I typically recommend that you carve out 10% of your retirement budget to giving instead of continuing with your pre-retirement levels. Whether it’s a church or any other charity, consider giving in the context of your budget rather than your income.

Remember, charity comes from a place of abundance. Once it begins negatively impacting your financial security, are you still doing good?

6. Not Spending Enough

This might come as a surprise, but not spending enough in retirement is one of the potential money traps for diligent savers. Remember, we only get one go-round in life. If you’ve completed your financial plan and your Monte Carlo probability of retirement success is 99%, it’s time to start planning the kitchen remodel, that trip to Italy, or the family beach vacation.

It’s easy to let fear trap us in a scarcity mentality. The whole idea here is to find the middle ground between spendthrift and hoarder. Your money should support your life, not the other way around.

5. Missing Medicare Enrollment

Don’t be late for court, your wedding, or Medicare enrollment! If you sign up outside of the initial enrollment period (or a special enrollment period), your premiums could be much, much higher. You’ll be paying these premiums for the rest of your life, so the consequences are real.

The Medicare initial enrollment period is a seven-month window that starts three months before you turn 65 and ends three months after you turn 65. There are other special enrollment periods that may apply to you – in a past blog post, I’ve written about some of the details.

4. Investing in a Startup Business

Whether it’s a restaurant, real estate venture, or tech startup, small businesses can offer an opportunity for big investment returns – along with a lot of risk. It can be tempting to get in early with a family member’s or friend’s business venture, but there’s a reason that the first round of investment in a business is often called the “FFF” round. It stands for “Friends, Family, and Fools”.

I certainly don’t want to dissuade you from investing in a small business – if you can afford to lose your investment. Small businesses contribute so much to our economy. However, the same idea behind limiting the amount of a “concentrated position” in your portfolio applies here.

Don’t invest so much in one thing that, if it goes under, it takes you down with it.

3. Living Large

Living above our means. It’s what we do in America. We’re incessantly bombarded with slick marketing and advertising designed to part us from our money. I’m still shocked by Expedia’s recent TV ad featuring Ewan McGregor. He says the quiet part out loud: “Do you think any of us will look back on our lives and regret the things we didn’t buy?”

Of course, he goes on to pitch Expedia’s services, but the point is made.

The number one driver of your retirement success is your everyday living expenses. This accounts for the overwhelming majority of your retirement spending. If you’re outspending your nest egg in those early years, well, that spells trouble later.

I’ve seen retirees live large, only to run out of money early in retirement. It’s not pretty.

Have I mentioned the benefits of creating a financial plan lately?

2. Enabling a Loved One

Enabling a loved one may be the most difficult money trap for retirees. Most often, this enabling comes as a “failure to launch” for a child or grandchild. None of us want to see our loved ones struggle, but an occasional helping hand can quickly turn into a lasting financial burden.

Let me clarify here – there’s a difference between enabling someone and caring for them. There are a lot of folks out there who are suffering from mental health issues, drug addiction, or alcohol abuse. The pandemic didn’t help.

There’s also nothing wrong with helping adult children or grandchildren who are standing on their own two feet. Your help may be the difference between getting by and thriving.

However, there’s a difference between being a lifeline and a being checkbook. Yes, life is hard, but smoking weed and playing video games every day isn’t the highest and best use of anyone’s time. Enabling a child’s desire to defer the responsibilities of adulthood will only delay the inevitable. Once your money’s run out, they’ll still be helpless.

Cutting off your financial assistance to a loved one can be heart-wrenching, but tough love may be in their best interests (and yours). Some of life’s best gifts sometimes come wrapped in sandpaper.

1. The Second Home

Most people massively underestimate the costs of carrying a second home in retirement. The ongoing costs, such as insurance and utilities, along with one-time expenses like maintenance, replacing appliances, and the occasional remodel, can be much larger than expected. And don’t forget about property taxes!

If you can afford a second home in retirement, congratulations. Having the ability to escape to the beach or the mountains at any moment sounds lovely. However, in my experience, most people underestimate the amount of savings required to support a second home in retirement by about half.

The second home has torpedoed many a financial plan. Given that most people only spend a few weeks each year at their second home, selling it and spending those few weeks renting – or at the Four Seasons, for that matter – could be the difference between running out of money and a secure retirement.

What do you think? Were there any surprises on this list? Did I leave anything out? If you’re worried about any of these money traps affecting your retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
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