Four common mistakes that will destroy your retirement
It's not the time to buy a new BMW, or to bankroll your child’s start-up
As you get older, you'll undoubtedly be thinking about retirement. Chances are you’ve been planning for it too, saving religiously for decades to one day be able to relax and put your feet up.
Entering retirement brings about many changes - some small, like not having to set a wake-up alarm, while other changes are more significant, like adjusting to a more flexible schedule and finding hobbies to fill your free time.
One of the biggest initial changes might be a huge spike in your bank balance, especially if you choose to take a portion of your retirement savings as a cash withdrawal.
This spike usually coincides with the so-called “honeymoon” stage of your retirement – that blissful, magical time when you suddenly have no traffic to contend with or any deadlines to meet. And with your bank account looking healthier than it has in the past 40 years… life is good!
You might have had the best pre-retirement plan ever, but don’t let your new (false) sense of security destroy all the hard work you’ve put into building towards your financial freedom.
The honeymoon stage is dangerous. Instead of placing your money thoughts on hold, you should be thinking of how to preserve and grow your savings to lay a solid foundation for the years to come.
Avoid these four common mistakes people make soon after they retire:
1. Retire with debt
Paying off all your debt before retirement is an important part of financial planning. The average person’s monthly income tends to reduce at retirement, so any debt repayments will take up a greater portion of that income, leaving you less money to live on.
If you still have outstanding debt when you retire, consider settling it with any lump sum payments you may receive. This way you’ll also avoid having to pay ongoing interest on your debt.
2. Underestimating how much money you’ll need
It’s a fallacy to think that you are covered with the money you have at retirement. Research has shown that only 6% of South Africans retire with enough capital to last until the very end. The other 94% will end up relying on family members or the state, or they’ll have to work again in old age.
When you retire, it’s important to look at your financial situation holistically and be honest with yourself about how you want to live. Be conservative, as people have been found to live longer, many far into their 90s. Will your savings sustain you for another 30 years, or does your retirement bucket have holes in it?
3. Spoiling yourself – or others
You’re a successful person and you’ve made it this far with savings to spare. Being in such a position might make you feel noble – you might want to help the people close to you, or you might have your eye on a new set of wheels. But now is not the time to rush out and buy a new BMW, or to bankroll your daughter’s start-up.
Be selfish in the honeymoon stage of your retirement. Use your newfound free time to carefully assess how much money you’ll need for yourself before you start thinking of luxury purchases and financial assistance for others. Remind yourself about the purpose of your money – the reason why you saved throughout your working life.
4. Trying to do it alone
Retirement is lovely but it’s not easy, especially when you have so many financial considerations to keep in mind. The best way to ensure that your savings will last you long into your golden years is to speak to an accredited financial adviser who can help you structure your investments to best suit your lifestyle. Your certified financial planner (CFP®) will also help you create a budget (and help you stick to it) and guide you on difficult decisions.
Physical health is one thing but taking care of your financial health is very important to give yourself the best chance of going the distance in retirement.
- Mokonoto is a CFP® and founder and CEO of YellowBlock.