Yahoo Finance I’m a Financial Planner: 5 Ways Not To Spend Down Your Savings in Retirement
When you’re working, saving for retirement feels like the hard part. But once you’re retired, the challenge becomes spending in a disciplined fashion and according to a well-thought-out plan.
“Managing retirement funds requires a strategic approach to balance present enjoyment and future needs,” said Marty Burbank, an estate planning and elder law attorney and the founder of OC Elder Law in Orange County, California.
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If you spend down your savings without a strategy, you risk outliving your money.
“We emphasize asset protection and sustainable withdrawal strategies to prevent such scenarios,” said Burbank, who sits on several prominent boards and has been recognized for his work helping veterans and retirees plan for their financial futures. “These involve setting up trusts and planning estates that align with a client’s long-term financial well-being, ensuring they don’t outlive their resources.”
GOBankingRates spoke with two financial planners who help clients develop strategies for making their money last — and both say it all starts with avoiding these retirement spending mistakes.
Gambling on a High-Risk Investment To Make Up for Insufficient Savings
Matthew Argyle is a chartered financial analyst, certified financial planner, enrolled agent and lead retirement planner for Encore Retirement Planning in Utah.
His No. 1 spending mistake comes from retirees who try to overcompensate for saving too little with a desperation wager on one last all-or-nothing hand. But Argyle knows that the first thing you should do when you realize you’re in a hole is stop digging.
“Betting big on a stock to try and make up for lost time is a great way to torpedo your retirement,” he said.
Burbank agrees. “I’ve seen many retirees make the mistake of spending their savings too quickly on high-risk investments in a bid to generate high returns,” he said. “This often results in significant financial losses rather than the intended growth of their nest egg.”
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Any Spending That Triggers Tax Surprises
Since withdrawals from pre-tax retirement savings accounts count toward your taxable income, the worst kind of spending is any that doesn’t consider how it might impact your standing with the IRS.
“I see retirees throw themselves into a tailspin after they ignore tax implications,” said Argyle. “Common mistakes I see are taking too much from an IRA, cashing in too many savings bonds or selling a property. Retirees can be haunted by delayed tax consequences, too. For example, Medicare’s dreaded Income-Related Monthly Adjustment Amount (IRMAA) can double or triple your Medicare premium — but this happens two years later.”
Spending on the Wrong Kind of Annuity
Annuities are insurance products that many retirees rely on to generate income that has the potential to last for life. They can be valuable arrows in the retirement quiver — but don’t spend money on one that will set you back in the long run.
“Buying an annuity with a high initial payout can cause permanent damage,” said Argyle. “Payments aren’t usually indexed to inflation. Take this into account, so you don’t end up in trouble when you’re least likely able to earn more — in your 80s.”
Spending To Support Adult Children Who Should Be Supporting Themselves
When adult children are conditioned to turn to their parents for financial help when money gets tight, that behavior is unlikely to stop when their parents retire. However, few retirees can simultaneously support themselves and their adult children while on a fixed income — and most shouldn’t try.
“You love them,” said Argyle. “They ask for your help. How can you say no? Consider the long-term implications of those gifts. Are you really helping them or enabling poor behavior? An emotional decision today can hurt you later. One of the worst forms of support I see is the ‘loan’ that never gets paid back. Encourage financial independence and set clear boundaries.”
Splurging on Early-Retirement Extravagances
If you’ve been planning your retirement for a long while, you’re undoubtedly eager to start living out your dreams. That’s natural, but a YOLO mindset is for the young — don’t let that excitement trigger reckless spending that you won’t have the income to make up for later.
“A common pitfall is overspending on luxury and travel early in retirement without a carefully structured budget,” said Burbank. “It’s essential to balance the desire to enjoy retirement with the need to ensure funds last throughout one’s later years. Underestimating the length of retirement can lead to financial strain in later decades.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner: 5 Ways Not To Spend Down Your Savings in Retirement
