Money Mistakes People Make in Their 50s
We've all made money mistakes over the course of our lives. It's only natural. But for those who are among the 50-plus demographic, money mistakes can have far greater consequences, including potentially delaying retirement or impacting the quality of your life during retirement. So, we asked money experts across the country to share some of the biggest financial mistakes made by those who are in their 50s. Here's what they had to say.
Sponsored: Retire in comfort without compromise
Are you one of 64% of Americans who thinks their retirement savings may not be enough? SmartAsset's free tool can match you with up to three fiduciary financial advisors in your area in five minutes to help answer that question.
See why 75 million people trust SmartAsset's tools and services each year to ensure they have enough money to retire comfortably.
Your 50s are a great time as they are typically your highest income-earning decade, says Lauren Rilling, a financial coach. "Most people assume they can afford a substantial lifestyle increase as their salary increases," Rilling explained. "However, you need to make sure you're adequately saving for retirement and other future expenses before spending the additional income." The last thing you want to do is live lavishly in your 50s and then have to survive on Social Security a few years later, Rilling said.
Related: 18 Ways Retirees Waste Their Money
Many parents want to help their children pay for college and often that involves signing on for a Parent Plus loan to provide the funding, Rilling says. But those in their later years might want to think twice about signing on for such a significant financial burden. "You are solely responsible for paying back the loan. Can you really afford to pay back all that debt in your 50s and 60s?" Rilling asked.
Related: 10 Things You Need to Know About Student Loans Right Now
Life insurance should be evaluated every few years to make sure the policy you initially purchased still meets your needs, said Mike Raines of Raines Insurance Group. "The majority of people purchase policies in their 30s and 40s," Raines said. "Often people purchase a term policy with a 10, 15 or 20-level term period. But, what happens when that term period expires and you still need protection? Now, you are 10, 15 or 20 years older and now have some health issues that might make life insurance unaffordable or even impossible to purchase." In other words, Raines said, it's better to reevaluate your life insurance needs every couple of years and adjust your policy to make sure it lasts as long as you need it to. Don't wait until the end of the term.
Related: How to Save on Life Insurance
"People believe that they will no longer have a commute, won't be eating out for lunch each day, the house will be paid off, and the kids will be independent," said Cory Nichols, owner of Yes Life Financial. "The reality is, in retirement you have more time and therefore you do more things. Things cost money." At a minimum you will continue to spend the same amount month to month upon retirement as you did prior to retirement, Nichols said.
Looking to save on senior products and services? Join AARP today.
Members age 50 and over get access to a wide range of exclusive discounts and benefits, including online events, classes, and community forums, as well as advice on everything from financial planning to health and wellness.
Related: Stop Paying for These 37 Things to Save Money Now
Turning 50 is a milestone number in the retirement savings process as this is the age that the government allows you to make an annual catch-up contribution of $1,000 to an IRA and a $6,500 catch-up contribution to your employer-sponsored retirement account, said Alicia Rose Hudnett, a financial planner, personal finance expert, and creator of The Business of Your Life. "If someone is in a position to increase their savings limit, then this is the first place to start," Hudnett said.
Related: How to Jump-Start Your Retirement Savings
For many people, Social Security will most likely be one piece of recreating an income stream in retirement and perhaps the only one that is guaranteed, said Hudnett, of The Business of Your Life. However, many people fail to regularly check on their expected benefits, which you can do by visiting the Social Security Administration website and creating a "my Social Security" account, which allows you to verify your earnings and see your estimated Social Security benefits. "As you approach retirement, it's a good idea to have some understanding of what is expected from Social Security so that you can make any adjustments that may be needed in your own personal saving," Hudnett explained.
Related: No Pension. No 401(k). How to Get by on Social Security
Age 59½ is another important number in the retirement savings process as it's generally the age that one can finally take penalty-free distributions, and in some cases tax-free distribution from retirement accounts, Hudnett said. "It's best to avoid withdrawing money before this age if you can," Hudnett explained. "If you have a life event and are in need of funds, be sure to check the IRS guidelines regarding penalty-free, but usually not income-tax-free, exceptions to this rule."
Related: How to Sock Away $50 a Month Into an IRA
"The biggest mistake that I see people make is putting too much of their retirement assets in qualified plans such as 401(k)s, IRAs, and 403(b)s. They have no tax diversification," said Cody Crawford, a retirement planner and investment adviser with SPG Advisors who specifically works with those in or near retirement. Those who have the majority of their income coming from such qualified plans will likely jump into much higher tax brackets, reducing their spendable income, said Crawford, who suggests that starting in your 50s, it's a good idea to explore Roth contributions with their employer, such as a Roth IRA or Roth 401(k). "Another great option is taking advantage of a health savings account," added Crawford. "This gives a triple whammy: pre-tax contributions, tax deferral, and free of income tax as long as it's been spent on medical expenses."
Related: Missing These Tax Credits and Deductions Could Cost You Thousands
Many of us have a checklist of the things we would like to do as we get older. But be careful not to go overboard in pursuit of accomplishing items on this list, said Igor Mitic, co-founder of the financial news site Fortunly, as doing so could have significant negative financial consequences, including delaying your retirement readiness. "As you approach retirement, it's best to focus on more realistic investments that will give you the peace of mind and the financial security you deserve when the time comes to retire," Mitic said. "Once you are comfortably retired and have your finances in order, then you can consider revisiting your bucket list."
For more great personal finance tips, please sign up for our free newsletters.
It's not uncommon to reach retirement and still have credit card and bank loan debt, said Mitic of the financial news site Fortunly. "To make matters worse, some choose to finally invest in their dream house, jet ski or favorite Jeep when they are approaching retirement," Mitic said. "The best thing to do is the opposite, and try to clear as much debt as possible and make realistic investments."
Related: Tactics for Getting Out of Debt
Pyramid schemes and scams tend to target older individuals who have more money and may be more vulnerable, Mitic said. "This can range from an innocent-looking door-to-door consultant that convinced you to commit to a monthly donation plan for a cause in Africa to more serious scams and pyramid schemes," Mitic said. "These may seem like a great investment opportunity at first until you are locked into a yearly plan that drains your finances."
Related: Watch Out for These Scams Targeting Seniors
Maxing out a retirement account, beginning as early in your career as possible, is important because it's one of the most efficient ways to grow wealth over time and support an uncertain future, said Greg Klingler, director of wealth management for the Government Employees' Benefit Association (GEBA). "For those lucky enough to work for an employer that provides a retirement plan with a contribution match, contributing a minimum of whatever that match is in order to take advantage of this 'free money' should be a no-brainer." If your take-home pay meets your living expenses, it's a good idea to contribute 10% to 15% of your salary to your retirement plan given that contributions are tax free, Klingler said.
Related: How to Protect Yourself from Financial Ruin in Retirement
Given that countless Americans struggle to produce $400 to pay an unexpected bill, everyone should have an emergency fund to prepare for an unexpected bill or income loss, said Klingler, director of wealth management for GEBA. "A good baseline is three to six months of expenses in liquid cash," Klingler said. "Studies show personalizing your accounts by naming them according to your goal is highly effective. We are more likely to contribute to a vacation fund or new car fund or emergency fund versus a nameless string of numbers."
Related: Painless Ways to Grow Your Emergency Fund
Mortality is hard to think about. What is doable, however, is getting your affairs and assets in order to prevent loved ones from inheriting a headache and legal fees in the event of a death, said Cody Barbo, founder of Trust & Will. Many adults don't think they need a will whatsoever and operate under the assumption that estate planning is a practice for only the very wealthy. "The reality is, no matter how few assets it seems someone owns, completing a few pieces of paperwork now can make a world of difference in the future," Barbo said.
Related: 20 Ways to Prepare for the Loss of a Spouse
Putting your children through private schools and expensive colleges is good and a noble idea, helping to give them a proper start in life. But this shouldn't be at the expense of your future in retirement, says Edith Muthoni, chief editor at LearnBonds, a site focused on various investment opportunities. "It is advisable that you maintain a healthy balance between supporting your children and investing in your future," Muthoni said. "Stop viewing your children as an investment and start pushing for a balance between your retirement plans and other financial commitments."
Related: Student Loan Debt Across America: Where Does Your State Rank?
At 50 years old, the best decision you can make regarding readiness for retirement is diversifying your portfolio, said Muthoni at LearnBonds. "But too many individuals within this age bracket will either invest too aggressively or too conservatively," Muthoni said. The downside of being too aggressive is that it tends to expose your savings to unnecessarily high risks when you don't have enough time to recover from possible losses. "Conservative investments and too much emphasis on safer investments when creating a portfolio ends up locking you out of possible investment wins," Muthoni added. "You need to master the art of maintaining a healthy investment portfolio that balances between high-risk and high-reward investments."
Related: Early Retirement Secrets and Strategies You Need to Know
A common mistake that many people make later in life is simply buying a home or buying a much larger home than they need. "Simply put, historically, residential real estate hasn't been a very good investment," said Robert Johnson, professor of finance at Creighton University. "In 2013, Nobel Laureate economist Robert Shiller was on 'Bloomberg' talking about residential real estate as an investment. Shiller said housing is traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems." In addition, Johnson noted, home equity can dissipate very quickly, as it did for many people during the financial crisis of 2008 and 2009.
Related: What to Know When Buying a House After 50
Often people think they're going to spend less when they retire, but that's not always the case, said Harsha Reddy, co-founder and editor-in-chief of SmallBizGenius. "Some expenses will decrease, for instance commuting costs, but others will rise," Reddy said, adding that many people fail to sit down and determine exactly how much they must save in order to live comfortably during retirement.
According to a recent study by the Blackstone Group, about 79% of middle-income baby boomers haven't set any money aside for medical expenses in retirement, said Danielle Roberts, a Medicare expert and personal finance writer for Forbes. "That's an alarming amount since Fidelity Investments reported that as of 2019, the average couple retiring at 65 will need $285,000 just to cover medical expenses," Roberts said.
Related: Reduce Your Healthcare Costs With These Expert Tips for Seniors
Staying with the same company for an extended period of time could be a huge financial mistake. "The days of promoting from within and tenure equating to job security and compensation advancement is long gone in most industries," said Keith Minn, managing partner at Minn Retirement Consultants. Those who stay employed at the same company for more than two years earn less over the course of a lifetime by about 50% or more, according to Forbes.
The term "boomerang kid" has increasingly been making its way into American vernacular, said Minn of Minn Retirement Consultants. "If one is fortunate enough to get their adult child or children to leave the home in a positive fashion, then they now have to face the possibility of them boomeranging back home one day," Minn explained. Additionally, there's the chance of one's aging parents needing care and assistance. "With the average senior couple aged 65 to 74 having only between $13,000 to $15,000 in savings, you can see the concern," added Minn, who suggests having a long-term care plan in place for parents before they get sick.
Related: This Is Why So Many People Feel Like They’ll Never Get to Retire
Often, as we approach retirement age, it's tempting to want to pay off your mortgage entirely. David Bakke, of Money Crashers, says this should not be your first priority. "Don't worry too much about your home mortgage if you have other debts with higher interest rates, such as credit cards," Bakke said. "Treat all debts in an objective fashion — the ones with the highest interest rates get addressed first. Work your way down the list from there."
Related: Refinancing Your Home: Should You or Shouldn't You?
Those who have debt and little savings may feel like their financial future is hopeless. But Rilling, the financial coach, says never give in to that kind of thinking. "Do what you can today to budget carefully, reduce spending, and increase your income," Rilling said. "Ten to 15 wealth-building years before retirement beats zero by a long shot."
Related: How to Build Wealth During a Recession
Like Cheapism's content? Make sure to follow us here.
