8 Common Mistakes Retirees Make When Putting Their Budgets Together
Written by
Cindy Lamothe
Edited by
Angela Corry
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Planning for retirement is an exciting time, but let’s be honest — creating a budget for it can be tricky. Whether you’re freshly retired or starting to think ahead, it’s easy to make some common missteps when figuring out how to manage your money.
Here are some of the most frequent budgeting mistakes retirees make and how you can avoid them to keep your finances in check.
Overestimating Investment Returns
According to Kevin Huffman, owner of Kriminil Trading, the most common — and costly — mistake retirees make when planning a budget is overestimating what their investments will return.
“Most retirees expect their portfolios to return 7% or more every year without fail, and are used to hearing this is ‘average’ for the market.”
But he said the markets are fickle, and lengthy downs and lower-than-expected returns can wreck a retirement strategy.
Underestimating their withdrawals could leave retirees with inflated expectations that risk their nest egg running out too gambled a long time, or steep adjustments in lifestyle in later life.
A sensible approach, Huffman explained, would be to use conservative return estimates, stress-test the budget under various market scenarios, and incorporate buffers to help mitigate the sequence-of-returns risk. Particularly in the early years of retirement, when poor market performance can pack a punch.
Not Reviewing and Adjusting Budgets Regularly
“Retirees often establish a budget early in retirement and then simply adhere to it for a decade or more, unmindful of inflation, rising health care costs or a change in spending patterns,” said Huffman.
They may, for instance, assume that they will spend less in retirement on travel or hobbies than they do now, only to learn that discretionary spending doesn’t fall so much as shift.
And fixed costs such as property taxes, insurance and medical care often increase faster than anticipated. Without regular annual check-ups, retirees may miss red flags such as increasing debt or unsustainable withdrawal rates.
He added that continually adjusting your budget based on the latest in real world events is a cornerstone of long term financial well being.
Underestimating Health Care Costs
Healthcare costs throw people off more than anything, said Andrew Lokenauth, money expert and owner of BeFluentInFinance.
In fact, Gallup reported that over 1 in 3 adults 50+ have forgone basics such as food to pay for healthcare.
“One of my clients thought Medicare would cover everything — spoiler: it doesn’t,” said Lokenauth.
He said she ended up spending $800+ per month on supplemental insurance, prescriptions and out-of-pocket costs.
“It’s wild how many folks underestimate medical expenses by $100K or more over retirement.”
Pricey Travel Expenses
Travel’s another big ticket item that trips people up.
“I get it — everyone dreams of that perfect retirement filled with exotic trips. But here’s the thing: most of my clients who planned for 2-3 major trips per year didn’t factor in all the little weekend getaways to see grandkids or friends,” said Lokenauth.
Those “small” trips add up fast. One couple he worked with blew through their entire annual travel budget by June.
High Housing Costs
People assume their mortgage will be paid off, so housing expenses will drop. But Lokenauth said he had a client in Phoenix who didn’t account for rising property taxes and insurance (up 40% in 5 years), plus maintenance on an aging home.
“Their AC unit died in July — there went $8,000 they hadn’t budgeted for.”
Failing to Account for Inflation
The inflation thing is brutal, said Lokenauth.
“I see way too many people create budgets using today’s prices without considering how costs rise over time.”
For example, a $50,000 annual budget today might need to be $75,000 in 15 years just to buy the same stuff.
One of his retired clients had to move to a smaller place because they didn’t factor in 20 years of price increases.
Helping Family Members Also Takes A Toll
Here’s another one nobody thinks about: helping family members.
“I’ve watched so many retirement budgets get destroyed because adult kids needed financial help or aging parents required care,” said Lokenauth.
He mentioned one couple had their perfect retirement plan sorted, then their daughter got divorced and needed help with her kids’ college education to the tune of $100,000.
Taxes Throw Everyone for A Loop
Lokenauth said many of his clients often forget that traditional IRA and 401k withdrawals get taxed as regular income.
Plus, Social Security can be taxed depending on your other income.
“I had a client who planned to withdraw $60,000 yearly but didn’t realize he’d need another $15,000 just to cover the taxes.”
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