People often learn many difficult lessons as they start saving for retirement, from the importance of setting money aside early to the complexities of predicting retirement expenses. Importantly, these lessons continue even after retirement, and many people express regrets about the things they wish they had known before retiring.
Learning about these lessons is a great way for you to better prepare for retirement. By learning from the mistakes of other people, you can position yourself to avoid those same common pitfalls. Some of the most common lessons learned after retiring include:
1. Lending is based on income, not assets
Many retirees grow frustrated when they attempt to purchase a car or a home. Unfortunately, most lending is based on income rather than on assets. In other words, someone with millions of dollars in retirement accounts can still be turned down by lenders or charged high-interest rates for a loan.
For many retirees, Social Security and investment income do not meet lending standards for income. Therefore, you should focus on getting whatever loans you need before you retire. While unexpected issues can arise, you should plan for new homes and vehicles before ending your full-time employment to get the best deals.
2. Spending patterns differ from predictions
One of the lessons that retirees quickly learn is that their spending patterns can differ greatly from their budget calculations. After all, creating a budget for retirement involves a lot of guesswork.
Here’s a tip: Once you have been retired for a year, look back at what you spent to recalculate your budget and understand your true spending patterns. The best way to figure out your actual expenses is to look at your bank statements from the first year, add all debits, and then divide by 12 to figure out an average monthly expenditure. This strategy helps account for unexpected expenses, such as home repairs. Your monthly expenditure should be revisited each year so that your expenses are shaped on reality rather than expectations.
3. Maximizing Social Security requires a strategy
Some retirees start claiming Social Security whenever they retire or simply start when they reach full retirement age. This approach can hurt you in the long run since the age at which you begin to claim Social Security affects the size of your monthly payments for the rest of your life. Beyond that, cost-of-living adjustments are a percentage of the payment, so a higher start results in larger increases down the line. You should have a clear strategy for claiming Social Security, which may mean forgoing payments for the first couple of years of retirement. Couples can often claim the payments from the lower earner to help bridge the gap until the higher earner’s benefit reaches its maximum.
4. Inflation can seriously cut into income
Too often, people forget to plan for inflation when they save for retirement. The inflation rate in the United States can significantly cut into your savings over time, especially since expenses like health care tend to increase at an even higher rate than general inflation.
Without a plan to deal with inflation, you may find yourself struggling later in retirement. While cost-of-living adjustments are factored into Social Security, these increases will not be enough to offset inflation. Experts often recommend creating a distinct pool of money when saving for retirement. This pool is allowed to continue growing through the early years of retirement, and it can be accessed in the later years to offset increasing costs.
5. Flexibility is extremely important
Preparing for retirement involves a lot of planning. Because of the time and effort spent on planning, people can react poorly when things do not go as they had planned. In the end, planning is essential for maintaining long-term solvency in retirement. At the same time, your situation can change in an instant, which is what the coronavirus pandemic taught many of us. For that reason, flexibility is just as important as planning.
You should include contingencies in your plan and know the answer to some of the bigger “what ifs” that retirees face. Wasting too much time on contingency planning is counterproductive, but it is important to build some sort of flexibility into your overall budget.
6. Some sort of sacrifice is necessary
You may have a grand plan for retirement, such as maintaining health, relationships with family and friends, and a robust entertainment budget. In the end, most people cannot have it all as there are simply too many buckets to fill.
Retirees often feel like they are doing great in a couple of areas of life and failing in others. When you begin to feel this way, you need to realize that you are not actually failing but simply experiencing something that all retirees do at one point or another. Luckily, once you recognize this feeling, you can begin to figure out what is most important to you and put your time and energy into the things that matter the most. Ultimately, making some sacrifices will help you feel more fulfilled.