informed decisions blog

8 Financial Mistakes To Avoid In Retirement. Blog 208

10th October 2022

Paddy Delaney

mistakes to avoid in retirement

There are several financial mistakes to avoid in retirement. These are some of the most common that can cause a successful transition from full-time employment to turn south. They can all be avoided with a bit of preparation, and a solid plan in place before you take the leap!

Key Takeaways

  • Be prepared for retirement lifestyle changes
  • Have a plan in place for elder care
  • Understand how Income Tax works in retirement
  • Don’t forget about inflation (kinda hard not at the moment!)
  • Stay active and socialise
  • Don’t delay retirement planning
  • Test your retirement lifestyle before retiring
  • Make a plan for any debt, or gifting

Of course, it’s easier not to, but planning for these well in advance of your retirement date will smooth your transition out of full-time employment. Plus, you’ll be happy knowing you’ve done everything you can to minimize any unwanted surprises!

Listen to the podcast here:

1. Not Adjusting Retirement Lifestyle

It doesn’t make good sense to just jump into retirement without taking a good look at the lifestyle you want and the associated expenses.

Like most people, your pension income will be different from what you were earning while working. One of the biggest financial mistakes retirees make when starting out in retirement is not preparing for this.

It is also one of the easiest financial mistakes to avoid in retirement if you have a good plan in place before picking a date to retire.

You will need to think about what essential expenses in retirement you will have and what are discretionary. We touch on this topic in blog 205, What To Consider When You Want To Retire and talk about tracking your spending in the years leading up to retirement.

2. Not Planning for Elder Care

Part of the lifestyle changes you will face in retirement is a change in your health. While we all hope that our health will stay good for as long as possible, declines are an inevitable part of aging.

Not planning for the costs and care you will face in the future can leave you in a difficult position. You might want to put a plan in place for when this time comes, and factor it into your budget.

In podcast 228, we talk to Niall Tinney about Nursing Home Costs and Planning For Them. There are things you can do well in advance of needing care, that can benefit us when we get to that point. Indeed, if you are the child of someone in that position – planning early is a key consideration.

You also need to consider any increases in healthcare and insurance costs (if applicable) you will have as you age. Underestimating these costs is one of the major financial mistakes to avoid in retirement, and one which many don’t spend enough time planning for.

3. Not Maximising and Understanding Tax in Retirement

During the accumulating phase of building your pension, you are able to take advantage of tax reliefs. However, when you start drawing your pension, it is a taxable income.

Many people have the misconception that while they get tax relief on the ‘way into’ pensions, they will just hand all that relief back when they start drawing their pension. They assume they will pay 40% tax on the way out. The reality is very different.

A retired couple with c70k total income (State Pension, ARF Income, Rental etc.) will only pay c17% total effective tax.  

Indeed, if using the Small Exemption Limit approach, a couple, where even one is 65 or older, can earn up to €36k taxable income, and pay 0% tax rate! All into the hand.

Before retirement, planning your budget will help you know what pension pots to tap into, when to do it, and how much to be aiming to draw. Having a sound plan will help you minimize your tax burden. Read Blog 195 for more on when to take pension benefits.

4. Not Considering Inflation

It is a subject that is all around us at the present moment – having been dormant for the previous 10 years! Of course, one needs to factor rising costs of everything they consume over a multi-decade retirement.

Based on the fact that, for most of us, our investments and pensions will be funding this rising expenditure, we need to ensure they are up to the task! We need to make sure our investments stand a good chance of growing in excess of inflation. Many people fall into the trap of being overly conservative in their investment strategy once they transition.

A good financial plan will help you plan for this and will include liquidity that can get you through market downturns. It can also help you explore the idea of allocating certain investments that you won’t need to touch for several years to more volatile/higher-growth strategies.

5. Not Engaging in Social and Physical Activities

According to former CEO of Retirement Planning Council, Derek Bell, once we retire, it is common for people to slip into a more isolated lifestyle. We might not know what to do with our time, which is a slippery slope potentially into depression and anxiety.

Use new free time to connect with friends and family. Try new activities to help you find new passions. Read all those books you never had time to read before and go for long relaxing walks! Men’s Sheds have proven to be a massive source of connection for men across the country, as one example.

6. Not Planning For Retirement Soon Enough

Preparing for retirement isn’t something you can do in the last couple of months or even year before you want to transition out of employment.

One aspect to try to maximise is your State Pension entitlements. Particularly if you retire earlier than your ‘Normal Retirement Age’, have you maximised your PRSI contributions and therefore maximised the State Pension you will receive. Drawing a small income from an ARF or from a business for example, even after retirement, is a way to sustain lifestyle and to continue your PRSI contributions if required to maximise your pension entitlement.

Separately, provided you have the means, it really is never too early to start a financial plan for retirement. Even if it means starting with saving and investing small amounts. Put in place goals for what pension you would like in the future and steadily work towards it, increasing as your capacity increases!

Tweak your plan as you go and your circumstance change. This will give you a solid retirement plan that helps you feel confident when you are ready to step away from work.

7. Not Rehearsing Your Retirement Lifestyle

Many retirees have big plans for how they will enjoy their retirement, but one common mistake is not testing out these plans before transitioning from accumulating money to drawing it down.

If you’re thinking of relocating, make sure to spend plenty of time pre-retirement in the location you’re thinking of to make sure you will be happy there.

Do a trial run of living on the income you will receive in retirement for several months to ensure you will be comfortable with your new budget, and that it feels right for you.

8. Taking on More Debt or Carrying Too Much Debt into Retirement

As your income will likely change in retirement, it is best to plan to not carry debt into that phase of life, if possible.

Obviously, it is a good idea to avoid taking on more debt that you will have to pay off on a lower income! The same goes for existing debt. A good plan will help you figure out the best way to manage the debt you have and put you in the best possible position when you retire.

Whether that is clearing the debt via small regular over-payments or investing a lump sum to be used to give you the option of clearing the debt when you transition. With interest rates rising, people with the means to do so, will be increasingly exploring the merits of clearing their mortgages early.

Bonus Mistake….

9. Don’t procrastinate!

I gather that there are tens of thousands of people that are financially capable of retiring but are afraid to act on it! They have the parachute packed properly, but they are frozen solid inside the safety of the plane. But they then start to justify their position to themselves and their loved ones. They are throwing-up excuses and pandering such as ‘I’ll do it next year’, or ‘now is not the right time’, or ‘I’ve a big project to get through first’ or ‘sure what would I do with myself’! All forms of procrastination.

As Seth Godin stated in his wonderful Blog (he does a post every single day!) in 2010:

The lizard brain adores a deadline that slips, an item that doesn’t ship and most of all, busywork.

These represent safety, because if you don’t challenge the status quo, you can’t be made fun of, can’t fail, can’t be laughed at. And so the resistance looks for ways to appear busy while not actually doing anything

Seth’s Blog

We must get to action, and taking action on the above 8 can help move you towards where we all know you want to be :).

Final Thoughts – Financial Mistakes to Avoid in Retirement

Facing some of the hard questions is important when it comes to retirement planning. By doing this, you minimise these potential threats that often rear their heads for people who transition. Don’t be one of them!

I hope it helps.


Paddy Delaney QFA RPA APA

Retired or close to it?

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