You finally retired, and suddenly that hard-earned nest egg feels like a new toy. Before you know it, you might be booking weekend trips or buying expensive gadgets and hobbies. However, if you continue to spend freely, your golden years may not shine as brightly.
The answer to your question culminates in a public crisis now endangering millions of American retirement accounts. According to the 2024 Retirement Confidence Survey by the Employee Benefit Research Institute, 51% of retirees acknowledge overspending, and up to a quarter report being “very concerned” about depleting their major source of income.
Overspending often occurs with expenses such as dining out, unexpected medical bills, or helping family members. Here are 12 common ways retirees spend money that may sound familiar.
Taking Social Security too early
29% of people took benefits at the exact age of 62, a figure that rose to 61% for those who filed before their full retirement age (FRA), according to data from the Bipartisan Policy Centre in 2022. Filing early will permanently reduce the monthly benefit amount retirees receive each month for the rest of their lives.
It can be tempting to start benefits early if you have no other income, but waiting can pay off. For each year you delay after your full retirement age, your monthly payments increase by approximately 8% until you reach age 70. This can make a big difference in your long-term savings.
Over-withdrawing from retirement accounts
The 4% withdrawal rule is dangerously outdated, yet retirees still follow it like gospel. According to a recent report in The Journal of Retirement, retirees who withdraw 4% of their portfolio every year run the risk of depleting their money nearly one in three times over the next half century.
It’s essential to review your withdrawal strategy and ensure it aligns with your goals and the current market conditions. A financial advisor can help you create a personalized long-term plan tailored to your specific situation.
Ignoring required minimum distributions
The IRS halved the penalty for failure to take RMDs from your traditional IRAs and 401(k)s at age 73, from a staggering 50% to ‘just’ 25%, then slashed that by an additional three-quarters to only 10% if it’s within two years and there’s reasonable cause.
RMDs can be expensive for forbearing to take, and this could affect your retirement savings very badly. Retirees will need a process in place or the assistance of a financial planner to ensure they make the necessary withdrawals on time, as mandated by IRS rules.
Paying excessive investment fees
A 2015 report by the Motley Fool states that the typical American could pay around $138,336 in 401(k) fees over her or his lifetime, according to a NerdWallet.com estimate based on median earnings starting at age 25 Many retirees are unaware they are paying expense ratios of greater than 1.5% annually on their investments – reducing portfolio values by as much as 30% over the next twenty-five years.
Fees can have a significant impact on the potential long-term growth of your investments and reduce the amount you may have in retirement. Even with the best intentions in preserving capital, managers and advisors need to have their feet held to the fire by clients who want to ensure they are not paying too much for their investments.
Supporting adult children financially
According to a survey by Money Magazine and GoBankingRates, half of U.S. parents with grown children are still offering regular financial help, at an average cost of about $1,500 per month, or nearly $18,000 annually. This often means that parents are sacrificing their own retirement savings to support their children.
This level of aid is typically less generous and can delay the financial independence of parents, potentially putting their long-term objectives at risk. Parents should be willing to draw clear lines and prioritize retirement planning to secure their financial future.
Relocating without proper planning
If you’re moving shortly, expect your relocation to cost an average of $2,000 or more — and be aware of potential unexpected expenses along the way. An AARP study found that 78% of individuals who relocated experienced unexpected costs during the process.
In addition to the cost of moving, other expenses that retirees often overlook include establishing new healthcare networks, higher property taxes, and lifestyle inflation in popular retirement destinations. Retirees should consider whether a move makes sense not just financially, but also emotionally, to ensure that moving does not bring unexpected hassles.
Making poor healthcare decisions
Understanding the growth in healthcare spending, particularly between 2013 and 2022, is essential for assessing the financial challenges it may pose. Without consumers actively comparing options and making informed choices, this burden could grow significantly.
To make sound decisions, residents need to evaluate available plans carefully, ensuring they provide sufficient provider coverage while also considering future healthcare needs.
Carrying too much debt into retirement
The 2022 Survey of Consumer Finances (SCF) found that 65% of households with heads aged 65–74 had debt in 2022, up from 50% in 1989. The median balance on mortgage debt was $155,600, with an average of $212,400. This suggests a large increase in the percentage of retirees carrying mortgage debt over the recent decades.
Due to these factors, high amounts of debt can lead to constipation, constraining your financial scope and making it inconvenient to afford life’s essentials. The prevalence of debt, particularly student loans, during retirement years underscores the importance of individuals planning ahead and managing their debts before leaving the workforce.
Falling for financial scams
The FBI reports that financial scams increased by 11% over the past year, totaling $3.4 billion among Americans aged 60 and older in 2023. Retirees with disposable income who are willing to support a profitable deal or those who believe it’s a legitimate opportunity are the primary targets of romance scams, investment fraud, and tech support schemes.
Retirees should be more skeptical of standard scam techniques that will reduce their susceptibility. Additionally, you must report suspected fraud promptly to prevent further losses and assist the authorities in their investigations.
Overestimating investment returns
Retirees routinely overestimate stock and bond investment returns, presuming, for example, that their portfolio will earn a 90-year average yearly yield without giving any regard to the potentially devastating effects of sequence of return risk or market volatility
Vanguard concluded that, when using an inflation-adjusted dollar withdrawal strategy over various periods of retirement, this slight timing difference at the start can make a substantial difference in long-term results. Portfolios are more likely to run out of money, resulting in a lower level of lifetime retirement income.
A little asset allocation and a regular rebalance will go a long way to help protect you from those risks. Retirees can enhance the sustainability of their retirement income by rebalancing portfolios to meet changing financial goals and market conditions.
Key takeaways
American retirees continue to make costly financial mistakes, such as drawing Social Security benefits too early or falling victim to investment scams. These errors siphon billions of dollars annually out of retirement accounts, leaving many older Americans poorer and unable to maintain comfortable retirements or return to work.
In addition to health costs, debts, and family support, these pressures can exacerbate the financial burdens that many retirees underestimate during their planning years. Building that cushion requires moderation of expectations, sound professional counsel, and careful implementation of comprehensive retirement strategies that address longevity, inflation, and market risk.
Disclaimer – This list is solely the author’s opinion based on research and publicly available information. It is not intended to be professional advice
Like our content? Be sure to follow us
