7 Bad Money Habits That Lead Retirees To Downsize — And How To Avoid Them

Downsizing is a great way to declutter and simplify your life, which is why many retirees do just that. But if you’re downsizing because you have no other choice, due to bad money habits, that’s where things quickly become stressful or even problematic.

Before you retire, here are some poor money habits that could lead you to having to downsize later in life — and what you can do to avoid them.

When you’re earning money, it’s often tempting to spend it. But while it’s okay to indulge every now and again, if you’re spending instead of saving or investing for retirement, you’re likely setting yourself up for future financial hardship.

“Probably the biggest factor forcing retirees to downsize is that they spent too much when they were working, often buying too many things they didn’t really need, taking on too much debt or saving too little for their retirement,” said Erika Kullberg, founder of Erika.com and an attorney and personal finance expert.

The good news is that there is a solution, especially if you still have some years until retirement.

“When it comes to the nuts and bolts of money management, budgeting is vital for financial fitness,” said Kullberg. “Start by identifying needs, earmark savings and investments, and put some aside for discretionary spending. Track your spending and avoid temptation to avoid lifestyle inflation.”

Having a budget while you’re working is important, but so is having one for your retirement years. After all, a significant portion of your income is likely to go away once you quit working.

If you don’t know how much you’re going to need, and if you don’t plan accordingly, you could end up having to downsize — such as by selling your home — just to make ends meet. That’s why it’s also wise to calculate your retirement savings goals as soon as possible.

“Take advantage of the free online retirement calculators available to help you figure out how much money you’ll need to retire,” said Todd Stearn, founder and CEO of The Money Manual. “It’s hard to tell if you’re saving enough to meet your goals if you haven’t firmly established what your goals are.”

“A very common error that leads to downsizing during retirement is failing to save sufficiently early in working life,” said Kullberg. “Some people underestimate the size of retirement savings they will need to have a comfortable retirement, while others expect to get a better return on their savings through investments than the return actually delivered. Then there are those who choose to delay saving until it is too late to accumulate a sufficiently large nest egg.”

Whatever the case may be, it’s better to start saving sooner rather than later. The worst case scenario is that you’ll have more than you actually need, and thus will have some extra fun money in retirement — or something to leave behind for your loved ones.

Preparing for retirement isn’t just about stashing your extra cash in a savings account. If you haven’t been investing your money, you could end up needing to downsize to afford your retirement years.

“To avoid this, simply invest in retirement. Open up an IRA/Roth IRA, maximize your contributions to your 401(k) if you have one, and simply plan your financial strategies to align with your long-term objectives,” said Aaron Cirksena, founder and CEO of MDRN Capital.

Starting early is also a good idea, as the more time you have to save and invest, the more your money can grow.

“For example, if you start saving $100 a month at age 25 and invest it in solid index funds every month until you are 65, you could have a million dollars,” said Cirksena. “But if you were to wait 10 years, you significantly decrease that amount.”

Another way to avoid having to downsize is to make long-term investments in a diverse portfolio — and to hold those investments even when things get tough.

“Establishing a diverse investment portfolio can help your wealth as a whole weather market downturns,” said Stearn. “Resist the urge to panic and lose money by selling anytime the economy gets rough.”

Many retirees have to downsize because they never changed their spending habits, or they’re not willing to, after leaving the workforce.

“As you prepare for the future, it is important to align your budget and financial strategy to align with long term goals, not just short-term,” said Cirksena. “Anticipate what your finances will look like when you retire — source of income, savings, healthcare costs, etc. — and adjust early to meet those needs.”

Failing to account for healthcare expenses can quickly lead to financial strain on your retirement budget. Even if you qualify for Medicare, you could still have to pay certain costs out of pocket. If you’re not prepared, you may have to find other ways to foot the bill — like the proceeds from your home or another job.

That’s why it’s important to take healthcare costs into consideration when planning your budget — both before and after you retire.

“Unfortunately, even when retirees consider their healthcare needs, they tend to underestimate the true costs in the years ahead,” said Kullberg. “Unchecked medical bills, long-term care expenses and the cost of necessary prescription drugs can quickly exhaust retirement savings.”

One way to avoid underestimating these costs is to dedicate a greater portion of your income to them early on. Another is to buy long-term care insurance or use a tax-advantaged health savings account (HSA).

Credit is important in many facets of life. From getting the best rates and terms on a mortgage loan to securing lower deposits or insurance premiums, having good credit is key.

But many people ignore their credit score. Or they don’t pay attention to their credit reports, which may have unchecked errors bringing down their score and costing them more money.

“Make sure you’re aware of what’s going on with your credit. Paying bills late can harm your credit score and make low interest rates unavailable to you going forward,” said Stearn. “That can have a significant impact on your bottom line for a long time to come.”