Four Common Pitfalls People Make Before They Retire
Retirement is a big step in life, and for many people, it’s a wonderful reward for years of hard work – it’s an opportunity to take up new hobbies, travel, and spend the twilight years with family and friends.
It can also be a scary transition, as that income that you had previously relied on to live is no longer there. With careful management, money need not be a concern, but there are a number of common errors that people make before retirement that can cause a great deal of stress.
Failing to calculate lifestyle costs
The weekly budget becomes an all-important consideration for a retiree. Through super or a pension, you should know how much money you’re going to have available to you each week once and it’s important to know if that will cover your expenses.
This doesn’t need to be a difficult process. Simply tally up everything that you spend money on – rates, electricity bills, insurance, car, and house maintenance expenses, phone bills, food, rent, and so on. If the cost of living will exceed what you can afford, then you’ll need to consider how to bring down the overall weekly bill.
These can be small things (canceling excess subscriptions, downscaling Internet plans, selling the second car), or they can be significant lifestyle changes (downsizing the house so maintenance, utilities, and insurance costs are reduced). Keep in mind, you can find a ton of great resources for lifestyle expenses online, like this rent report from ABODO for example.
Having a poor saving strategy
Unlike in some countries around the world, superannuation is not mandatory. Meaning that people are not required to put aside some of their income to save towards retirement. A pension system exists to ensure that no one goes without income in retirement, but to live a comfortable lifestyle in retirement, you should be looking to save from a young age.
Superannuation systems do exist for people who want to start. It can be difficult to understand how much you want to have available in retirement from a young age, of course. Because you’re going to need to cover 20 years of living, don’t leave the saving to the last 5-10 years of work. These savings should be built over a career, where possible.
Not being prepared for things to go wrong
Did you know that funeral costs, on average, more than $10,000 for burial, or $7,000 for a cremation? Hospital, medication, and other costs also tend to escalate in the later stages of life, as operations and more frequent procedures become part of life. These costs can become a real burden, as they’re not part of the budget and are significant enough to cause financial distress.
There are two options to manage these costs. You could set up a “rainy day” fund, which you manage yourself. This allows you to minimize the fees of insurance but can be risky if a couple of major expenses come within a short span of time of one another. The second option is to make sure that you’ve got a good level of insurance cover across health, contents, and life insurance.
Cashing out too early
When you’ve got a big bank of savings, such as in a superannuation account, it can be tempting to make use of that money while you’re still working. For example, while you’re limited in what you can do with your superannuation balance (so you can’t use it as a standard savings account), there are areas where you’re permitted to dip into your savings, such as when buying a first house.
Avoid doing this where you can. Superannuation accumulates as a compound investment, meaning that the longer the money is saved, the more it is worth, as additional money generated in the superannuation portfolio is invested back into it.
That withdrawal to purchase a home at age 40 might seem like a good idea, but that’s money that misses out on accumulating over 20 years, which can significantly impact on your pool of savings at retirement.
If you’re keeping your own retirement savings, it’s even more important to be disciplined and not use those savings for something that might seem important at the time. The opportunity for a new business venture or property might seem like a long-term earning option, but nothing is as important as that pool of raw savings and investments.
The main mistake that people make when preparing to retire is to start the process too late. People can be so caught up in their work and careers that it’s only as these things start to wind down that the next stage of life becomes a consideration.
However, that’s a quick way to ensure that you’re not prepared for retirement. Living for 20 years, if not longer, on no active income is a major investment and project, and you need to start preparing for that in your 40s, if not earlier, in order to enjoy your retirement comfortably and on your terms.