As the baby boomers retire, they are many of them faced with unexpected financial challenges that threaten their long-term financial well-being. Even those who have worked diligently and saved throughout their years of productive work might find themselves unable to maintain their purchasing power and slide into poverty.
Recognizing and avoiding typical financial traps can assist retirees in protecting their assets and living a secure retirement. If you are approaching retirement or already retired, you must identify these common pitfalls and take the necessary steps to avoid financial distress. The following are three typical errors that can have a profound effect on a retiree’s financial health.
The dangers of carrying credit card debt
One of the biggest financial mistakes retirees make is carrying a balance on their credit cards. Credit card balances can spiral out of control due to the high interest rates, and it is increasingly hard to pay them off. This is particularly difficult for retirees who went from a steady paycheck to a fixed income, which makes it harder to cope with accumulating interest charges.
Ashley Rittershaus, a certified financial planner (CFP) and owner of Curious Crow Financial Planning, advises retirees to retire high-interest debt right away.
“Work to pay down high-interest debt as quickly as possible and pay your credit card balance in full each month to avoid interest charges,” Rittershaus said.
Accumulating credit card debt can also be an indicator of spending more than one’s income. Retirees can analyze their lifestyle and cut back to prevent spending daily on credit cards. They can create a budget that is in line with their retirement income to avoid spending excessively and to remain debt-free.
The consequences of collecting social security too early
Social Security payments are a valuable source of money for many retirees, but accepting them early means long-term costs. While individuals can begin collecting Social Security at age 62, accepting it will significantly decrease their monthly check.
For example, those who apply when they are 62 receive only 70% of their full benefits, while delaying until 67 age assures them 100% of what they are entitled to. Should the retirees delay further, their benefits continue to increase. For each additional month of delay between ages 67 and 70, they receive an 8% increase in their payment. By waiting until age 70, beneficiaries receive 124% of their full benefit, providing them with much more financial security in later life.
The optimal approach is dependent on your own situation, but for others, this might mean waiting until age 70 to claim Social Security,” Rittershaus stated.
Social Security deferment will particularly benefit retired individuals who anticipate longer lives or have other sources of income for maintaining them in their first years of retirement. Beneficiaries who claim benefits prematurely may struggle to pay bills when they become older and their capital holdings start to erode.
Underestimating healthcare and long-term care costs
Another error that retirees often commit is unrealistic expectations about health and long-term care costs. Even though Medicare covers many of the health care costs, it does not cover all. The costs of dental work, eye exams, hearing aids, and prescription drugs are quick to accumulate. Long-term care activities such as in-home nursing or an assisted living facility also can cost an arm and a leg and are not typically covered under Medicare.
Failure to plan for such expenses can drain retirement savings very fast, making retirees vulnerable financially. To shun this threat, retirees may purchase supplemental medical insurance, such as Medigap or Medicare Advantage plans, that will cover other medical expenses. Purchasing long-term care insurance when still healthy can also act as insurance against the significant expenses of nursing home or assisted living care.
Advance planning and setting aside funds, particularly for medical needs can prevent financial distress later on. The well-planned retiree needs to include rising medical expenses in his calculations and should have sufficient funds to meet his lifestyle throughout his remaining years.
