By Deborah Jeanne Sergeant
At this point in your life, you’re probably earning more than ever as you look forward to retirement. If you have a goal for retiring by a certain age, it’s important to break the following bad money habits now.
1. Making financial decisions based upon feelings.
You may feel concerned when the stock market plunges; however, you should focus on the long-term plan.
“Be careful to not make emotional decisions at critical times,” said Adam Mark, certified financial planner and president of Wealth Management Group, LLC in Rochester. “Don’t panic when we have big market moves.”
Big jumps and plunges in the market even out over time, he said.
2. Spending money frivolously.
Expensive trips, clothing you don’t need, a few new toys, indulging the grandchildren, memberships you don’t use: it’s easy to fritter away money without thinking about it. If your ability to retire when you want seems doubtful, you need to “come up with a plan and look at your projection,” Mark said. “Look at day-to-day spending. Spend on purpose and know where your money goes.
“How important are the things you’re spending money on? You may need to make tough decisions. If you know where money goes, you know where you can cut back. Save more and save on purpose.”
Instead of making saving the last thing you do with the money left over, “pay” your savings accounts and investments first, Mark said.
3. Not setting priorities.
Does it feel like each paycheck could go in a dozen different directions? It’s easy to become distracted and put money into areas that won’t result in a long-term benefits.
“I recommend to people to prioritize things,” said Jeff Feldman, Ph.D. and certified financial planner with Rochester Financial Services in Pittsford. “I see a lot of people spending money on things I’d consider non essential projects.”
Taking out a home equity loan or withdrawing from retirement savings indicates you can’t afford a $30,000 kitchen renovation. A few choices like this can derail your finances. What’s worse is that going for the most upscale appointments can result in a house with a resale value that outpaces the rest of the neighborhood so you can’t readily sell it for what it’s worth.
It’s better to perform a few small-scale cosmetic upgrades, like refinishing the cupboard fronts and changing out the knobs instead of installing new cabinetry.
4. Assuming you have enough to retire when you want.
“People need to understand how much money they need to retire,” Feldman said. “Some say they’ll retire at 62 and they are of the mindset that when they hit a certain age, they’ll automatically retire.”
Feldman explained that to replace a $60,000 annual salary, a person would need to figure what he would receive from Social Security — perhaps $25,000 a year — and what would come from investments.
“If you have to take out $30,000 annually from investments, there’s the 4% rule,” Feldman said. “You can take out only 4% a year. You’d need $750,000 in investments to do that. If they have $300,000 saved up, they can’t take out $30,000 a year. They have to be realistic when they approach it.”
5. Working longer for healthcare benefits.
If you have grown tired of your job and want to retire, don’t worry about working for healthcare benefits if you are doing well financially.
“Sometimes they over emphasize the health benefits,” Feldman said. “They say they have enough money to retire and they say they have to work until 65 to get Medicare. Health costs are another expense they have to factor in.”
With the healthcare exchange, many people can obtain coverage for $5,000 to $7,000 per year, which Feldman doesn’t view as an obstacle to retiring at 62 if all other financial ducks are in a row.
6. Carrying balances on high interest credit cards.
While most people need a credit card — it’s hard to book a flight, rent a room or buy online without one — balances on high interest cards are a bad idea because you’re paying to spend money you don’t have. This also indicates that you’re living outside your means.
“Request annual credit reports to check for irregularities,” said Elizabeth A. Thorley, certified financial planner and president and CEO of Thorley Wealth Management in Pittsford. “The site www.annualcreditreport.com goes through the three credit bureaus.”
People tend to rely too much on credit cards because they live paycheck to paycheck.
“Have more than three months’ expenses in cash reserves,” Thorley advised. “Know your fixed expenses versus discretionary expenses: what you need on a monthly basis to maintain your lifestyle.”
7. Ignoring end-of-life planning.
Death is an uncomfortable topic for most people; however, it’s unavoidable. To lessen the burden on family members, it’s vital to plan for it financially.
Thorley said that many people don’t have up-to-date estate documents and life insurance. She advises against term life insurance, since it’s intended for temporary use.
“It gets more expensive as you get older,” she added.
She also knew someone who worked at a company 30 years and never looked at the benefits only to realize the person’s deceased mother was listed as the beneficiary.
“It can generate a lot of additional steps for a beneficiary to claim an inheritance,” Thorley said. “You can avoid the stress in an already stressful situation.”
She also wants more people to pay attention to long-term care costs in their retirement planning.
“Plan for that rainy day that we all don’t want to consider but we may have to,” she said.
The cost of nursing home care is around $11,756.00 for a semi-private room to $12,189.00 for a private room per month in New York, according to www.seniorliving.org.
8. Receiving large tax refunds
Thorley advises that any tax rebate that is 10% of your tax liability or larger is too big.
Think of it as an interest-free loan to the government that keeps your money tied up instead of doing something for you.
“You should be saving or paying down debt,” she said.
9. Pay off student debts with retirement funds.
Sure, you want to help your children or grandchildren obtain their education; however, if you can’t do that along with sufficiently funding your retirement, favor your retirement.
“You can’t borrow to live in retirement,” Thorley said. “You’ll need those resources. Adult children will have 30 years of working. Time is not on your side. It’s detrimental unless you’re willing to work more.”
10. Claiming Social Security too early or too late.
Thorley recommends people to wait to collect benefits until they turn 70. “Everyone becomes eligible at 62 but they get the maximum benefit at age 70,” she said. “If you’re a widow or widower, you can claim as early as 60. Your full benefit depends upon the year of your birth.”