Avoiding the 10 Money Pits of Retirement
These expenses can put your retirement in jeopardy if you're not careful
There are so many scary things about retirement: All that free time to suddenly fill. The slew of health care decisions, from Medicare to supplemental health insurance to long-term care insurance. But the scariest thing of all is figuring out how to avoid falling into the dangerous money pits of retirement.
There are many.
Some are obvious, and some are total shockers. But each one can put a serious ding in your retirement savings. Which is why Next Avenue reached out to three retirement gurus to offer tips on how to avoid them. Here are 10 big money pits of retirement (in no particular order), with solutions to avoid them:
Retirement Money Pit No. 1: ATM Stops
Solution: Limit your ATM stops — and the amount you withdraw from them. Not only is much of the money you withdraw often unaccounted for, if you’re not using an ATM from your bank’s network, you can be stuck with stiff fees for using it.
Dental expenses are not covered by Medicare and can come as a shock to retirees.
The biggest problem with cash dispensed by an ATM is, “The money goes and you don’t know where it’s gone,” says John Essigman, CEO of John Essigman Wealth Advisors in Cleveland, Ga.
Instead of stopping at the ATM, Essigman suggests using your debit card for most purchases. That way, you avoid interest charges on credit cards and can keep better track of your spending.
Retirement Money Pit No. 2: Dental Costs
Solution: Budget seriously for this. Dental expenses are not covered by Medicare and can come as a shock to retirees. No, not the teeth cleanings or annual check-ups or even the cavity fillings, but the extraordinarily high costs of things like root canals, crowns, tooth replacement or gum surgery for retirees no longer are covered by an employer’s dental care policy.
At some point in retirement, virtually everyone incurs significant dental costs that can exceed $10,000, warns Ed Kohihepp Sr., CEO of Kohlhepp Investment Advisors in Doylestown, Pa. He suggests setting aside at least $2,000 (per person) annually for dental care so the money is there when you need it.
Retirement Money Pit No. 3: Little-used Subscriptions
Solution: Drop them once you’ve stopped using them. For one investment adviser, that realization came as he was speaking with this Next Avenue reporter. Scott Reed, the Florence, Ala.-based CEO of the wealth advisory firm Hardy Reed, subscribed to HBO specifically so he and his family could stay culturally connected and watch Game of Thrones. But wait, the final episode aired in May 2019! And the family has since stopped watching HBO — but hasn’t cancelled their subscription.
“I’m paying $12 per month for something we don’t even use,” Reed says. He suggests all retirees take a second look for subscriptions that they, too, have stopped using or seldom use — from magazines to a cable TV channel.
Retirement Money Pit No. 4: Costly Life Insurance Policies
Solution: If you have kids and they’re out of college, consider dropping this insurance. It’s a good idea to review all your insurance when you start retirement. But a reevaluation of life insurance is especially smart if you’ve got kids and they no longer depend on your income for support. Then, it may be time to consider dropping or cutting back on your life insurance policy, says Essigman.
Retirement Money Pit No. 5: Eating Out
Solution: Make restaurant dining occasional, not daily. Essigman has some clients who eat out every day. Some can afford it; some can’t. If that one meal for two costs roughly $50 per day, the expenses over a year add up to an astounding $18,000. If you and your retired spouse or partner also stop at Starbucks for two grande cappuccinos every day (at about $12 per day), that’s another $4,400 — which bloats the annual eating out budget to more than $22,000. “That would sure buy a lot of groceries,” says Essigman.
Retirement Money Pit No. 6: Gifts to Your Grown Kids
Solution: Get your financial adviser’s ok first. Sure, if you have an adult child, it’s fine to sometimes give him or her a $100 gift — or even a $1,000 gift, if you can afford it and the occasion merits it. But don’t make gifts of $5,000 or more to any of your children (or grandchildren) without running the idea by your financial adviser, suggests Kohlhepp. When you’re retired and not receiving full-time employment income, you might not be able to be so generous.
“This is something that can be very difficult to turn off once you retire,” Kohlhepp says.
Retirement Money Pit No. 7: A Credit Card Balance
Solution: Pay your credit cards in full every month. Before you retired, the first “bill” you were supposed to pay every month was the money you put into your 401(k) or IRA. Now, the first bill you pay every month is your credit card bill — which you should try to pay in full with zero balance, says Reed. Retirees, he says, can’t afford the high interest rates of credit cards when every dollar they spend counts.
Retirement Money Pit No. 8: Failing to Stick to a Budget
Solution: Create a budget that’s set in stone. Most people don’t create a monthly budget before they retire, which makes it even more difficult for them to create one after they retire. But since your income will almost surely decline once you retire, establishing and sticking with a reasonable budget becomes even more essential, says Essigman.
Retirement Money Pit No. 9: Home Remodeling
Solution: Remodel strategically. Home remodeling, particularly in retirement, can be a never-ending money pit. Many people who are retired keep adding on to their homes to make them more suitable and more luxurious, says Essigman. “A retired couple can live just fine in 1,000 square feet,” he says.
Retirement Money Pit No. 10: Health Care Costs
Solution: Hire a Medicare adviser. “It’s surprising how many retirees don’t understand Medicare at all, nor do they understand Medicare supplemental policies,” says Kohlhepp. He suggests hiring a Medicare adviser, particularly to help with choosing Medicare Part D drug plans, which can change annually.