Five pitfalls you should avoid in retirement

You work hard and save aggressively so that one day you can retire from the workforce. When the fabled day arrives and you enter the blissful state of retirement, you may be tempted to think you’re done agonizing over your money and savings. The truth is the hard work is probably just beginning. Assuming you’re like most of us, with a finite number of dollars available to fund your retirement, you need a plan to make sure you are spending and investing in the most optimal way to make your money last as long as possible. Here are five pitfalls to avoid in retirement to help you preserve your assets and maintain your lifestyle for years to come.

Don’t retire too early. It’s difficult to predict how long you will live, but longevity trends suggest the likelihood of longer life spans for current and future retirees. If you retire at age 62, you could live another 20 or 30 years. Not only do you need to think about how long your money will last, you should also consider the consequences for taking early withdrawals from your retirement nest egg. Also consider that if you choose to take Social Security early, you agree to receive a reduced amount each month for the privilege of potentially more years of the benefit. Your Social Security statement can help you determine the financial trade-offs of taking early benefits or postponing Social Security income for a few years.

Don’t rely on just one form of income. You probably realize that Social Security is unlikely to provide you with enough money to live on in retirement, and that you will need additional sources of income to live comfortably. Most retirees look to a number of sources to cobble together a retirement income. Even though you’re retired, you can still seek out growth investments, assuming you retain a good share of your savings in less risky ventures. Seek balance by diversifying or spreading your savings across a variety of investments with varying levels of risk. A financial advisor can help you select from available stocks and bonds to keep your money working for you and help generate investment income.

Beware of insurance gaps. Your insurance needs may change in retirement, but they won’t go away. You may need to replace employer-sponsored benefits such as life, health and dental insurance after you retire. Shop around for attractive price points and good quality plans. Even if your home is paid for, you should maintain an appropriate level of homeowners’ insurance in case of theft, fire or other incidences. Consider whether long-term care insurance for you and your spouse is something you want to help pay for things like long-term care in a nursing home.

Avoid tax mistakes with retirement distributions. Your sources of income in retirement may include Social Security, a company-sponsored pension plan, IRA, 401(k) or a profit sharing plan. How you access your savings in these various investment vehicles can have a profound affect on how long your money lasts. The IRS regulates how much you can take out of your retirement accounts each year and you can incur stiff tax penalties if you do not abide by the rules. Talk to your tax preparer and financial advisor about required minimum distributions from your retirement accounts and establish a schedule of withdrawals that satisfies requirements while preserving principal. At retirement, you are generally required to begin taking minimum distributions from qualified retirement plans by April 1 of the year after you turn 70½.

Don’t underestimate the impact of inflation. When you estimate how much you need in retirement, don’t forget to consider how inflation reduces the value of your savings over time. Your budget should factor in rising health care costs and other expenses that may grow disproportionately. In general, early retirees spend more on travel and hobbies while they are still active and healthy; these costs may go down as you get older.

Get professional advice. A knowledgeable financial advisor can help you analyze your retirement portfolio and recommend steps to help you make choices with your retirement assets. Talk to your advisor and tax professional to plan your distributions to help reduce your tax obligation. With careful planning, you can effectively manage your retirement assets — and relax and enjoy the golden years.

Holiday fun can be affordable

Traditionally, the holiday season is a time of indulgences.  Any combination of gifts, travel and entertaining can result in big end-of-year expenditures.  But this year — in light of declining investment portfolios, sinking house values and a shaky job market — many American consumers will be looking for ways to toast the season without breaking the bank.  If you, too, want to avoid over-spending, here are some tips to celebrate more frugally:

Set proper expectations
It helps to make sure everybody in your family is onboard with the cost-conscious approach.  If you are married, have a frank discussion with your spouse about spending limits.  If you have children, make sure they understand that your plans for the holidays will focus on fun that can be had without spending a lot of money. If your children are old enough, you may even use this as an opportunity to explain the fundamentals of household economics and involve them in setting holiday spending priorities for the family.

Plan ahead
Take time to write down a list of possible gifts you hope to purchase for family and friends.  Knowing what you want ahead of time may help you avoid making poor decisions and impulse purchases once you hit the stores.

Invest time to save money
The best deals can be found by shopping around.  Check out stores in your area and investigate what’s available online.  The emergence of online shopping has made it much easier to do your homework before you buy.  Web retailers will help you determine best prices for the products you are looking to purchase.

Track your spending
One of the best ways to keep spending under control is to set a limit.  Within your family, this can be on a per-person basis, or you can set a budget that dictates your maximum holiday spending.  Once this number is chosen, see if you can come in under budget.  Track all of your purchases and be certain to hold onto receipts.  You might also request gift receipts where available and tuck them inside cards or gift boxes.

Be smart about gift cards
Gift cards have become increasingly popular and more widely available.  Make sure you understand the terms of a gift card (such as expiration dates) before making a purchase.

Get a jump on the season
Given the forecast for below-average consumer spending, many retailers are cautious to avoid stockpiling large inventories this holiday season.  If you shop early, you will be more likely to find what you’re looking for at a reasonable price.  Conversely, last minute shopping could result in spending more than you planned, particularly if you are determined to buy specific items.

And finally…
These tips are about gift buying.  But rather than making gifts and packages the center of your holiday celebration, try putting more emphasis on spending quality time with family and friends.  Encourage games and conversation; you may be surprised to find how little you miss the excesses of years past. n