If you're within five to 10 years of retirement, you need to start thinking about how to preserve your retirement wealth.
I talk a lot about the importance of investing appropriately, especially for those nearing retirement. In simple terms, this generally means reducing your level of investment risk as you approach and then enter retirement.
But we also need to think about the spending choices we make. This becomes extremely important in retirement when our sources of income likely will be more limited than during our working years. To make it a little trickier, retiring with a substantial nest egg can lull the unwary into a false sense of financial security. Don't let yourself fall into that trap! Otherwise you may find your nest egg shrinking at an alarming rate.
To help avoid blowing through your nest egg too quickly, give some serious advance thought to how you can dodge these retirement money-wasters:
1. Paying a mortgage during retirement.
Carrying a mortgage during retirement can be an enormous and unnecessary expense. If you're retiring with a mortgage, you may be stretching yourself too far.
Rather than retiring with a mortgage, consider working a couple more years to pay it off, or weigh the option of selling your current home and using the net proceeds to purchase another home. Downsizing is completely appropriate in retirement – it's OK to own a two-bedroom apartment that's paid off!
2. Not living in the place you want to spend your time.
Traveling is expensive. To minimize unnecessary travel expenses, you may want to actually live in the geographic region where you plan to spend the most time.
Some people get carried away by purchasing a "vacation destination" home at retirement, and then spend more time in a town or city where they have family. If there's a lot of back-and-forth travel, it may be wiser to live near family and take periodic vacations elsewhere.
3. Adopting too many expensive hobbies.
Hobbies are a great way to stay mentally and physically active, meet new people and just enjoy retirement. However, hobbies that require frequent equipment upgrades, lessons, membership dues or travel can get very pricey.
Investigate a hobby before you dive in. Figure out how much it's going to cost, and try it out before you start spending a lot of money on it. Retirement should be enjoyable, but spending more than you have by taking on hobbies you can't afford will end up taking the fun out of it.
4. Spending too much money on other people.
Your family cannot and should not expect that you will support them. Repeat after me: you are not obligated to pay for your grandchildren's education, fund large purchases or buy expensive gifts for them. Take care of yourself before you take care of anyone else – your family will be grateful for your self-sufficiency later when you don't need to ask them for financial assistance.
5. Accruing credit card debt.
During retirement, you shouldn't have any credit card debt. Most retirees won't find a new supply of money. Even if you did, the money should be invested and/or spent on standard expenses and hobbies, not paying credit card companies. It is critically important that you live within your means and don't overreach – the exact opposite of racking up credit card debt.
6. Owning a car that's expensive to repair.
If your car is a lemon that breaks down frequently or an exotic vehicle requiring highly specialized care, it's probably time for a trade-in. Spend your money wisely on a make and model highly rated both for reliability and low maintenance so you can limit how much money you put in it down the road.
7. Paying for long-term care.
Long-term care costs can drain a nest egg in a matter of months or a few short years. One of the best protections you can have against this rapid depletion of your retirement accounts may be long-term care insurance, so do your homework and explore your options.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.