10 Financial Mistakes to Avoid in Retirement

By Maurie Backman Markets Fool.com

Retirement may be a well-deserved, extended period of leisure for some seniors, but for others, it can be a time riddled with financial stress. Steering clear of these key mistakes, however, can help keep that stress to a minimum.

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1. Forgetting to shift to conservative investments

Your working years are a great time to sport a stock-heavy portfolio, since stocks have historically offered higher returns than bonds. The downside, however, is that stocks are also more volatile, and while they're a good choice for younger workers with time to ride out the market's swings, they're a far riskier prospect for retirees, who often require instant liquidity. While it's a smart idea to hold onto some stocks as a senior, make sure your portfolio has a reasonably balanced mix of stocks and bonds.

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2. Cashing out strong investments

Some seniors are quick to dump their stocks for fear that the market will take a dip and they won't have time to recover. But liquidating all of your stock investments isn't wise, especially if you have dividend-paying stocks in your portfolio. While the value of these stocks might drop during periods of market upheaval, it often pays to retain them as a source of income nonetheless -- especially if you're talking about established companies with strong histories of consistent dividend payments and earnings.

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3. Claiming Social Security sooner than you need to

Some seniors rush to claim Social Security at age 62 because it's the earliest possible age to get benefits. Others opt to wait until reaching full retirement age, which, for today's older workers, is 66, 67, or somewhere in between. But if you're still working part-time in retirement, or have enough income from savings to pay your living expenses, it pays to hold off on Social Security until 70. By doing so, you'll get an automatic 8% boost in benefits per year. And while a strong enough investment portfolio might deliver an 8% return, as well, delaying Social Security is a good way to achieve risk-free 8% growth on your benefit payments.

4. Spending too much money early on

Those first few years of retirement are the perfect time to travel, pursue hobbies, and do the things you've always wanted to do while you're still relatively young and healthy. But if you're not careful about how much you spend, you could end up in a precarious financial situation down the line.

The Employee Benefit Research Institute reports that 46% of households spend more money during their first two years of retirement than they do at the tail end of their working years, and for 33% of households, this trend lasts for six years into retirement. If you have the money, then by all means, treat yourself, but if your savings are limited, be careful not to blow through them too quickly.

5. Forgetting about taxes

Many seniors assume they won't have to pay much in the way of taxes once they stop working. But unless you have a Roth IRA or 401(k), your retirement plan withdrawals will be taxed as ordinary income in retirement.

Similarly, if you have income outside of Social Security, your monthly benefit payments may be taxed, as well. Not only that, but there are 13 states that tax Social Security income to varying degrees, so you may lose a portion of your benefits depending on where you live.

As you map out your retirement budget based on your projected income, be sure to take taxes into account. Otherwise, you might end up spending more than you should.

6. Holding onto an expensive house

Even if you're among the lucky seniors who get to enter retirement mortgage free, owning a home is still an expensive prospect. Not only will you have property taxes and insurance to deal with, but you'll also have to bear the cost of maintenance.

The typical homeowner spends 1% to 4% of his or her home's value on annual upkeep, but if you've been in your home for 30 years or more, you can probably count on hitting the higher end of that range. A better solution might be to downsize to a smaller space, or one that's less costly to maintain.

7. Enrolling late in Medicare

Your initial Medicare enrollment window spans seven months, starting three months before the month of your 65th birthday and culminating three months after the month you turn 65. If you fail to sign up during this period, you'll still have more opportunities to enroll, but you could face hefty penalties for signing up too late.For every 12 months you go without Medicare Part B coverage, you'll increase your premiums by 10%.

Similarly, if you go 63 days or more without a Part D prescription drug plan, you'll face a penalty equal to 1% of the national base beneficiary premium -- currently $35.63 multiplied by the number of months you go without coverage. Signing up 12 months late, for instance, will add $4.30 each month to your Part D premiums. It pays to enroll on time to avoid paying these higher fees for life.

8. Dining out too often

Tempting as it may be to feast on those early bird specials, you'll get much more of a bargain by dining at home. The typical restaurant charges a 300% markup on food, which means that a $30 entree can generally be prepared in your own kitchen for a mere $10. Eating out frequently can put a huge strain on your budget, so you're better off dining at home and reserving those restaurant meals for special occasions.

9. Ignoring required minimum distributions

Unless you have a Roth account, you must begin withdrawing funds from your traditional IRA or 401(k) once you turn 70 1/2. Your specific required minimum distribution (RMD) will depend on your account balance and life expectancy at the time, but if you fail to take your RMD in full, you'll be penalized to the tune of 50% of the amount you neglect to remove from your account.

In other words, if your RMD for the year is $6,000 and you don't take it at all, you'll pay a $3,000 penalty. Pay attention to RMDs so that you don't lose a chunk of your hard-earned savings for no good reason.

10. Neglecting health issues

Many seniors ignore medical issues because they're worried about paying for treatment or struggle to even get to their doctors' offices in the first place. But neglecting a health problem not only compromises your long-term well-being, but sets the stage for what could be costlier treatment down the line.

Medicare offers a number of free health services that can help you get ahead of medical issues before they worsen, so it pays to familiarize yourself with the no-cost benefits you're entitled to. Furthermore, the program's telehealth services make it easy for patients to connect with medical professionals without having to leave the house.

Most retirees need all the money they can get. Avoid these mistakes, and you'll avoid the financial anxiety that inevitably goes along with them.

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