5 big money mistakes to avoid as you near retirement

When you’ve worked hard to achieve your financial goals, the last thing you want to do is take a step that could derail them.  

Fortunately, many mistakes are fairly easy to prevent. Here are five common money mistakes and some tips to help avoid them.  

1. Not having a budget

As retirement looms closer, you want to make sure you have enough savings to retire on your own terms. Having a budget helps you know how much you spend and, therefore, how much you’ll need to have saved once you retire. Also, sticking to a budget can help boost your savings during your final working years. If you don’t already have a budget in place, now is the time to make one. If you already have a budget, you may want to review it for opportunities to potentially cut back and save more. 

Having a budget can also help you become a more disciplined spender, which can be useful once you’re living on a fixed income during retirement.

2. Forgoing protection

Unexpected expenses and other emergencies can get your retirement and other financial goals off track. Fortunately, you can help protect yourself from the unexpected by having an emergency fund and the proper insurance in place. 

Maintaining three to six months of total expenses in an emergency fund is appropriate for most people, even during retirement. The higher your risks of an unexpected expense and the more comfort you want, the more money you should save for emergencies. 

Similarly, having the proper insurance in place can help protect yourself and your loved ones. This can include health, home, auto, life, disability and long-term care insurance, to name a few. While insurance premiums can certainly add up, not having insurance can be even more costly if an emergency does arise, which is more common than many people think. Including insurance premiums in your budget can help you plan for and manage these ongoing expenses. 

3. Having too much debt and only paying the minimums 

While many people tend to focus on their assets and investments, it’s just as important to focus on debts, particularly high-interest debt like credit card debt. Having too much debt can be detrimental to achieving your financial goals. But how do you know if you have “too much” debt? 

To start, you can calculate your debt-to-income (DTI) ratio by dividing your total monthly debt payments by your gross monthly income. In general, work toward a DTI ratio below 35% if you have a mortgage, or 20% if you don’t. If your DTI ratio is too high, consider paying your high-interest debt first, as it can lower the amount you pay in interest over time. 

Another mistake some people make is only paying the minimums on their debt payments. While paying the minimums can help you avoid fees and penalties, you’ll end up holding debt for longer and paying more in interest. As a result, see if you can put extra money toward your debts. Again, making a budget can help you find additional savings that you could allocate to your debts.

4. Not positioning your portfolio for retirement 

Another common mistake is not positioning your portfolio if you’re nearing retirement. This often takes one of two forms: holding too much cash or taking on too much risk.

While there are risks to investing, there are risks to not investing as well. By holding too much cash, you could be risking the potential size of your portfolio, the future income provided from your portfolio and, as a result, your potential lifestyle in retirement. Keep in mind that once you reach retirement, you’ll still want to invest to help make sure your portfolio continues to grow to help outpace inflation and reduce the risk of outliving your money. 

But at the same time, the closer you get to retirement, the less risk you’ll generally want to take when it comes to your asset allocation. This typically means having less in stocks and more in fixed income like bonds. You’ll want to work with your financial advisor to find the allocation that fits your needs and goals. 

5. Poor tax planning 

Another common mistake is not taking taxes into account — or only thinking about this year’s taxes — when working toward your financial goals. 

Some tax-planning strategies you can look into include tax-loss harvesting, where you sell a security at a loss to help reduce your current year’s capital gains tax, or converting funds from a traditional retirement account into a Roth account to gain access to tax-free distributions in retirement. Tax-planning strategies can be complex and subject to particular rules, so be sure to consult your financial advisor and tax professional. 

Finally, if you’re starting to think about your legacy, you’ll want to be aware of estate taxes to help reduce the amount of taxes your estate or your heirs may pay later. Your financial advisor can work with you and your legal and tax professionals to help ensure your strategy reflects your current wishes as well as current tax laws. 

How Edward Jones can help

You don’t have to go through your financial journey alone. A financial advisor can help identify which of these mistakes you could potentially be making so you can best position yourself for the future.