Five Terrible Money Mistakes That’ll Wreck Your Retirement
No one wants a lean, downgraded lifestyle in retirement. Stay off that path by avoiding these money no-nos.
Alternatively, you could save 15% of your $50,000 salary at the same growth rate. After 30 years, you’ll have $767,000 — or much more if you raise your contribution every time your pay increases. Commit to saving that 15% for the long haul. If you have fewer than 30 years before your target retirement date, increase that percentage to 20% or 25% to make up for lost time.
3. Refinancing your mortgage improperly. Refinancing your mortgage to consolidate debt might seem like a wise financial move. But if you refinance repeatedly without reducing the term of your loan, you’re racking up lots of interest changes and pushing back your final payoff date.
In the early years, mortgage payments are mostly comprised of interest charges. Consider a 30-year, 4.5% home loan in the amount of $200,000. The first 12 payments on this mortgage will total $12,160.44. Nearly $9,000 of that represents interest charges. Only $3,226.45 in that first year pays down your debt balance.
Front-loaded interest isn’t a bad thing when you see the loan through to the end. But if you refinance every five or 10 years, you are punting that big debt balance and increasing the likelihood of having a mortgage payment in your senior years. On the other hand, owning a home free and clear in retirement gives you options, like the ability to raise cash through a reverse mortgage or by downsizing.
Think twice before refinancing your mortgage with a 30-year term. If you have to relocate, consider a 15-year or 20-year mortgage to avoid resetting your payoff clock.
4. Living the high life. Unless you have a large stream of passive income, a lavish lifestyle in your working years translates to a leaner lifestyle in retirement. Spending on exotic vacations, fancy meals, and even expensive cars depletes your wealth and reduces what you could be saving in your retirement accounts. You’ll also become accustomed to a lifestyle you can’t support once your paycheck goes away.
That’s not to say you can’t go on vacation or buy a new car. But you could swap out the $10,000 vacation for a $2,000 road trip or trade in the luxury car for a reliable, mid-sized vehicle. Then, direct the money you’ve saved into your 401(k) by way of higher contributions. You’ll be glad you made those choices when you can retire with money in the bank.