6 Retirement Moves Frugal People Never Make
Written by
John Csiszar
Edited by
Amber Barkley
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Retirement is meant to be enjoyed. But as retirees generally live on a fixed income, overspending can be a real danger. With no way to replace your savings, failing to keep a close eye on your costs can result in you outliving your income. For this reason, frugal retirees understand that making financial moves that are too risky or expensive can be a terrible mistake.
Here are a few of the mistakes you’ll want to avoid that are unfortunately all too common.
Going Into Debt
One of the cardinal rules of keeping out of financial trouble in retirement is to avoid going into debt, especially credit card debt. While it’s still a problem while you’re working, at least you can put in extra hours, ask for a raise or shift your budget around to help keep your debt under control.
In retirement, you won’t have nearly as much financial flexibility. And with credit card interest rates averaging over 20%, debt can double in less than four years. Frugal retirees will avoid credit card debt at all cost, because even a small debt can quickly get out of control.
Overlooking Inflation
Retirement projections can be a tricky thing. After all, no one knows how long they will live or what investment return they will earn. However, one of the most important variables is often left out of retirement planning altogether — inflation.
A $1 million nest egg might seem like more than enough to fund a long retirement, and indeed it might. But if you neglect to factor in the effects of inflation, you might find yourself having to trim your budget every year. Even a relatively modest 3% inflation rate means your costs will double in just 24 years. In other words, a retirement income of $50,000 in today’s dollars would only cover $25,000 worth of expenses in 24 years.
Spending Without a Budget
Some retirees view a budget as restricting, but it’s an essential part of successful planning if you want to make your money last. Frugal retirees will always have a budget, because they want to make sure they aren’t spending more than they are earning.
While it can be exciting to retire and finally have the freedom to do whatever you want, if you don’t keep your spending under control, you’ll be sacrificing your long-term financial security for short-term enjoyment.
Withdrawing Retirement Accounts in a Lump Sum
Some retirees think that they should withdraw their retirement accounts in a lump sum as soon as they stop working. In most cases, this is one of the worst things you can do, and it’s something that frugal retirees will avoid at all costs for at least three reasons.
First, if you take a large amount out of your retirement accounts all at once, you will likely face a huge tax bill. With the exception of Roth accounts, your retirement withdrawals will be taxed as ordinary income. If you take a six-figure distribution, for example, you’ll likely jump up at least one tax bracket, meaning you’ll be paying more tax than you should.
Second, if you take out all of your retirement money and simply place it into your checking account, it can be hard to resist overspending.
Third, any money you take out of your retirement account will no longer enjoy tax-deferred growth. At best, you’ll earn checking or savings account interest, which won’t extend the life of your money nearly as well as a retirement account could.
Buying Timeshares
Timeshares can be costly, restrictive investments that are hard to get out of, and that’s a bad combination that frugal retirees usually avoid. Unlike rental or investment real estate, or even a personal home, timeshares rarely appreciate in value, and they’re often hard to sell. Meanwhile, they have costly ongoing fees and expenses that can eat into a fixed retirement income.
As retirees are often targeted by timeshare sellers, it’s important to be aware of the possible financial ramifications.
Supporting Adult Children
One of the natural instincts of many retirees is to share their wealth with others. In many cases, this takes the form of supporting adult children. But many financial experts — and frugal retirees — recommend avoiding this impulse.
While there is nothing wrong with helping someone out from time to time, making it a habit can lead to all sorts of problems, not the least of which is endangering your own financial security. If you’re living on a fixed income and have a set budget, taking on the burdens of an additional person could lead to financial ruin in the long run.
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