6 Biggest Mistakes Retirees Make

Over the 13 years I have been providing retirement advice to clients, there are a number of mistakes that I see people make in the run up to their retirement and during retirement. In some cases, the mistakes they make has lead to them having a miserable retirement. Here, I go through the 6 biggest mistakes retirees make.

1. Debt

Carrying debt into retirement is the biggest mistake of them all.

You have to remember that when you retire, your income will be vastly reduced, so any repayments will now take a much higher percentage of your income. For example, some earning €3,000 a month net before retirement repaying €1,000 in loans, has to pay 33% of income in loans. If they have a pension of 50% of salary, that loan repayment is suddendly 66% of income! Suddenly, those plans to have 4 holidays a year seem further away than ever.

If you get to retirement with debt, do the boring thing, use your tax-free lump sum to clear the debt.

 2. Giving their money away

You get to retirement and you are given a cheque for more money than you have ever had before in your life. It is like a windfall, so of course you are happy to share it with your loved ones.

But it is not a windfall. You have saved this money over your working life and it is part of your retirement income.

Now, I am not against people helping out their children but you have to figure out how much you need yourself first. When you know this amount, you can then see how much you can give your children to help them out.

 3.  No plan

Most people enter retirement with no plan. What are you going to do in retirement? So, how many holidays do you want to take? What classes do you want to take? Do you want to escape to warmer climates in the winter? Remember, you now have an extra 40 hours a week to fill and all the annual leave you can deal with. All of this costs money and needs to be planned for. It is more likely that most of these expenses will be at the beginning of retirement when you are able to move around a lot. In older age, comfort is more important and less expensive.

 4. Inflation

It is always there and never goes away. So why do so many people ignore it? Even in these low inflation times, inflation has run at an average of 1.78% per year over the last 10 years. It was an average of 3.02% for the previous ten years. That means something costing €100 at the start of the decade would increase to €119.30 or €134.65 respectively. And that’s before mentioning the increases in the cost of private health care which seems to go up by 15% several times a year. It is therefore vital that you ensure that your income also increases each year.

 5. Outdated view of retirement

This is a very common one. People think the kids will have flown the coup, all the debts will be paid and they will need a fraction of the income they had while they were earning. Wrong! Kids are moving out of home later or continuing education longer than was planned for. Even if they are gone from the family home, you can rest assured that they will still be a financial strain on you for years to come. People are carrying debt into retirement (we discussed that already). As for needing less income? The people I see who are really enjoying their retirement are spending more now than when they were working. They have all this spare time and places to see. Retirement isn’t about stopping work and waiting to die. Most retiree’s live over 20 years in retirement. There’s a lot to do in that time.

 6.  Afraid of investment risk

A lot of retirees now chose to manage their own retirement fund in an Approved Retirement Fund (ARF) insead of buying an annuity off an insurance company. With requirements to draw down 5% of the fund each year (or just pay the tax for an equivalent amount) and cash interest rates so low, there is an ever increasing chance of your fund dying before you do!

While there is risk in investing in equities, they are the best performing long term asset class. Having a portion of your fund invested in equities and bonds as well as cash will diversify your portfolio and in the long term, your fund will outperform deposits. It is important to strike the right balance, that is where your financial planner can advise, but leaving it all in cash will only eat away at your fund.