How Can Pre-Retirees Avoid Money Pitfalls as They Near Retirement?

When I develop these articles, I research, brainstorm, and write an outline. For this one, I could have gone on and on and on. I could write a whole book on the potential pitfalls that arise as we near retirement. Today, I will focus on mindsets, spending, savings, debt, and risk. I hope that you can identify with some of these pitfalls and that it stirs your thoughts.

The Mindset You Have Matters

We all justify the money decisions we make at almost every stage of life, but as we get older and we’ve worked hard, we can start to feel that we deserve that new car or that vacation or to renovate the kitchen. It might be true that we’ve worked hard, but does that mean we are in a position to spend whatever we want? I call this entitlement syndrome. Let’s not torpedo all our hard work by making a short-term decision that affects the longevity of our financial plan.

The other mindset that can cause you to stumble is being too scared to leave a job that is sucking the life from you. It can feel like looking over a cliff, knowing your familiar source of income will be gone. But if you’ve worked hard, lived on less than you made, invested for the long term, and built up savings, this mindset unnecessarily eats up the joy you could reap. While you don’t want to justify poor decisions like I referenced above, you don’t want to hold on too tight and have trouble enjoying the peace that comes from being in an excellent financial position either. This is where I will tend to battle myself.

Spending

One practical example to watch for is the common idea of downsizing. It’s thought that by downsizing, we reduce property taxes and maintenance costs, and pocket some equity to pad our nest egg. In reality, downsizing sometimes results in unanticipated costs and add-ons that negate the benefit you thought you would reap from the sale. Having a second set of eyes is wise to help you think through the decision.

It’s not only significant financial decisions that can be a pitfall. Excessive regular spending silently eats away at the progress you are trying to make. I’ve found it difficult, if not impossible, to find the leak in that hose without a written plan, a.k.a a budget. Just like I might check the water bill to catch if I left the hose running, the budget helps me find where I’m leaking cash meant for the goal we told ourselves we valued more. The budget is the tool Tanya and I use to pay attention; to be intentional. We have a monthly budget meeting before the start of every month to check in and stay on track.

One final spending example that came to mind is supporting our adult children. Their well-being tugs on our heartstrings, and we feel a sense of duty and obligation to our kids. Some of that is God-given and good, but some are imposed by unhealthy expectations we or others have of ourselves. Avoid guilt and entitlement as the source of any support you give. Also, be realistic about what you can and can’t do. It’s OK to say no. At some point, our children need to leave our responsibility, and we consider our long-term financial stability with more weight. If you support them, do it as freely as possible without any strings.

Savings

Make sure you have built up a reservoir of savings for unexpected and urgent events, a.k.a the emergency fund. This is a fund you keep separate and don’t touch for any reason except the two I mentioned – unexpected and urgent. You’ll be glad you have it when you need it. Without it, you might be forced to take money from your investments when the market is down or when it’s not advantageous from a tax perspective.

Consider portfolio risk as you approach retirement. You could be on the side of not being invested enough, so you miss out on growth while you still have plenty of years to prepare. You could also go to the other extreme and have too much in the way of market risk. Like the three bears, you don’t want your portfolio to be too hot or cold, but just right.

As a last savings pitfall to avoid, don’t miss out on catch-up contributions into your retirement accounts if you can afford it. Workplace plans generally allow you an additional $7,500/yr. and IRAs an additional $1,000/yr. contribution in the year you turn 50. We’ll have an updated article about the Secure Act 2.0 in October, so watch for that.

Debt

The goal as you approach retirement is to be completely out of debt. That means credit card debt, car loans, student loans, and mortgages. Think of all the margin you will have if you’ve eliminated these costs from your expenditure. You’ll have more peace of mind in retirement and more to give to causes and people you care about. That also means you don’t need to play the 0% financing game either. Get used to spending what you have when you have it now, so you don’t form a bad habit for later.

Risk

The significant risk to ponder at this stage is that of long-term care. As you get into your 50s and approach 60, this is an excellent time to assess whether you need insurance for long-term care or have enough assets to cover that risk yourself. You don’t want to buy this insurance too early when the statistics show there’s a low probability you’ll need it, but if you wait too long, you may not qualify.

Swinging Over the Pit

This is a smattering of some of the things to consider. How can you beat and swing over pitfalls like Tarzan & Jane? As our client, we take the time to clarify your goals, look holistically at all these factors, help you avoid pitfalls, and craft a plan that will give you a high probability of success. We perform a detailed analysis of all the aspects you need to consider and ensure your plan has a high probability of success if you avoid the pitfalls. Contact us today to review your plan or discover how we can walk alongside you toward success.