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Retirement for many Americans is a time to let loose: to set inhibitions free and live life to the fullest. But no matter how hard-earned, you're going to have to do some hard spending. Life costs money, and living the next few decades without strain means staying on top of your finances.
Not fun, right? But necessary. What's more, retirees who mind their finances (and plan well) should still have plenty of cash to live their retirement dreams. Whether you want to take a worldwide cruise, move to a sunny coast, or make a dream big-ticket purchase, all it takes is preparation and identifying where money is spent frivolously.
Let's look at the five most common ways new retirees from the baby boomer generation waste money, and how retirees can take action before managing finances gets out of hand.
It doesn't matter whether you stay in the home you've had for decades, downsize to a new location or even purchase a larger home: There are plenty of ways to waste money on housing. While many retirees choose downsizing, going smaller can actually mean bigger costs.
In fact, housing tends to be our largest expense, taking up 33.8% of total spending, according to a study by the Bureau of Labor Statistics (BLS). Another study by the Center for Retirement Research at Boston College found that on average, downsizing could decrease housing costs by 30%.
So take a hard look at not just home prices but also related expenses: upkeep, taxes, insurance, and utilities, for starters. If these will strain your finances, consider a more cost-effective home and/or location that fits in your budget.
Healthcare costs are high and will continue to climb as we age. While baby boomers may not worry too much about it now, chronic conditions can start to impact health, especially as one gets close to 80. After housing, healthcare costs tend to be the second-largest expense for retirees, according to a 2021 study by Vanguard. In fact, for a typical 65-year-old woman, Vanguard estimated "an annual health care expense of $5,100 for 2020."
This leads many retirees to underestimate how much healthcare, insurance premiums, prescription drugs and even long-term care can cost. A study by Fidelity in 2022 reported that a 65-year-old couple would need about $315,000 after taxes just to cover healthcare expenses in retirement.
While it might seem as though there isn't much you can do, pay attention to your spending right now. Look at coverage that might fall short on more pressing needs down the line, and expensive healthcare services. Also, look up healthcare plans to find one that works best for you. A financial advisor can certainly help with these aspects, and resources such as ClearHealthCosts.com can help you make sense of medical costs in your backyard.
Sadly, some of the most vulnerable people make prime targets for financial scams. Retirees need to protect themselves from fraudsters who promise high returns on fake investments, solicit donations to non-existent charities, or pretend to represent the Internal Revenue Service (IRS). The IRS has a list of scammer types to watch out for, especially in the post-tax season.
Yet many still fall for these ruses, with older adults the main target of fraud. According to the Federal Trade Commission (FTS), there were more than 1.4 million fraud reports made by those over 60 in 2020, which came to a total loss of $966 million!
When in the slightest doubt, do not share any sensitive personal or financial information - and never send money to unknown individuals or organizations. Do your own research and speak with a financial advisor. Further, if you're worried about getting dinged by the IRS, call them directly. (Commonly, scammers will use numbers that show up with the Washington D.C. 202 area code.) They'll be sure to tell you whether you actually owe anything.
One of the easiest ways to collect and yet waste money is by taking out Social Security benefits at the wrong time. This can eliminate the opportunity for higher benefits and yet many baby boomers claim the cash as soon as they're eligible.
Cashing in early means reduced monthly payments long term, as each year of delay increases the amount you can collect by 8% until the age of 70, according to the Social Security Administration (SSA), when retirees hit full-retirement age. Yet many continue to collect payments far earlier.
Certainly, necessity will often dictate when Social Security benefits must be taken. But all things being equal, look at your situation to see how this could impact you over the long haul. Meet with a financial planner to see if you can wait until the full retirement age and take advantage of thousands in additional income.
When you're young, there's time to make investments and leave them to grow. But there's pressure for retirees who need cash and need it now. This can lead to some bad investment decisions, risky moves and significant financial losses.
Yet it's not just about poor performance by an investment. The financial traps can also include exorbitant fees that erode savings over time, according to 2020 research by Vanguard: "Every dollar paid for management fees or trading commissions is simply a dollar less earning a potential return."
Again, meet with your financial advisor to figure out which investments you should make based on your comfort level and goals. Then review and rebalance regularly to ensure you maintain a well-diversified, long-term investment strategy.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.