Getting ready for retirement should be fun, a time of relaxed planning and dreaming big. What will you do with your free time? How will you design your future?
Of course, behind every decision to come there is one big driver: money. Being free to pursue new goals and a new lifestyle will be largely a matter of having made the right moves in preparing for retirement, while avoiding the wrong moves.
Here are the five finance missteps you must avoid if you are to get to your golden years with little worry:
1. 'Upsizing' your spending
It's a common error, and a difficult one to avoid. After years of diligently saving for retirement, the urge to loosen your belt and enjoy your money can be overwhelming. People sometimes immediately buy dream homes or book round-the-world cruise and golf vacations.
Give yourself a full 12 months on your new retirement income schedule before updating your car, your hobbies or your travel plans. The reality of a fixed income will be very clear in a few months, and you will be better able to stave off post-retirement spending sprees.
2. Too much risk
Often, people enter retirement with a balance at the bank that they know will not cover the total cost of their retirement years. So they engage in investing strategies more appropriate to investors half their age or less.
The result, too often, is a hole blown in the side of their portfolio the size of a cruise ship. If you feel the necessity to take a flier on a penny stock or trade commodities to pad your retirement fund, the more likely answer is that you are not ready to quit work.
3. Too little risk
You have a nice-sized portfolio. You have a broadly diversified set of investments. And you are nearly 100% in bonds and cash. Uh-oh. Here's the problem: Being overly conservative with your investments can come back to bite you later on. You are likely to need some stock holdings to withstand inflation as the years pass, for instance.
4. Skimping on insurance
It's very likely that you took the right steps during your working years to transfer away financial risk by owning life insurance and perhaps disability insurance. Now the house is paid off and the kids in college, so what could go wrong?
Plenty. Consider upping your homeowner coverage to replacement cost, in case a fire strikes. Likewise, check your auto insurance coverages. You are not likely to improve as a driver as you age. Finally, if you have teen drivers at home or a lot of guests and contractors coming by, umbrella coverage can buy you real peace of mind for not much cash.
5. Assumptions on longevity
You won't live forever, but it's unfortunately easy to live longer than your money will last you. Pension funds and annuities lower the personal risk by spreading payments out over large groups. As an individual retiree, you will have to a pick a high number and make your plans around that.
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