8 Budgeting Mistakes You Can Easily Avoid in Early Retirement

Consider the budgeting mistakes you might be making before you begin retirement!

Settling in for a leisurely retirement is something we all dream about. But once that moment finally arrives, ensure you’re not making budgeting mistakes. You might be surprised to find that it’s not as stress-free as you imagined it to be.

You’re suddenly living on a fixed income, and every dollar counts. Depending on how old you are when you finally retire, you might have another 30-plus years of living to budget for.

And that’s not even counting any unforeseen increased medical expenses that could arise at any time. So if you’ve just started saving for retirement and are playing catch-up, several budgeting mistakes can jeopardize your retirement plans.

Let’s take a look at what they are and how you can avoid them.

Budgeting mistake: Failing to consider your taxes

Benjamin Franklin once said that “nothing is certain except death and taxes.” So remember that just because you retire doesn’t mean your taxes will cease to exist.

When you’re planning for your golden years, you need to stay on top of the taxes you’ll have to pay on distributions from your retirement accounts. Regarding traditional 401(k)s and IRAs, retirement withdrawals will be taxed as ordinary income.

The amount you will need to pay in taxes will depend on your tax bracket in retirement. Even if you think that your marginal tax rate will be lower in retirement than it is now, it’s essential to plan for these tax payments, so that they don’t catch you off guard.

Budgeting mistake: claiming Social Security too soon

Some early retirees rush to claim Social Security when they’re 62 years old because it’s the earliest possible stage to get benefits. Other seniors choose to wait until they reach the full retirement age, which is around 66, depending on today’s older workers.

But if you decide to still work part-time when you’re retired, or you have enough earnings from savings to be able to pay living expenses, it’s worth holding off on Social Security until you reach age 70. If you do, you’ll automatically get an 8% annual boost in benefits. And while a strong investment portfolio might also deliver an 8% return, delaying Social Security is an excellent way of achieving risk-free 8% growth on your benefit payments.

Budgeting mistake: spending too much money at the beginning of your retirement

Those first couple of years of retirement are the ideal time to pursue some new hobbies, travel, and do the things you’ve never had the chance to do. You’ll probably be in a hurry to accomplish many things while you’re still fairly young and healthy.

But if you’re not careful about watching your spending, you could end up in a dangerous financial situation down the road.

Research shows that 46 percent of households spend more finances during their first two years of retirement than they do at the end of their working years. And for 33 percent of those households, this trend lasts for another four years into their retirement.

If you’re well off, then, by all means, you should treat yourself. But if your savings are limited, avoid blowing through them too fast.

Budgeting mistake: stopping your contributions

Steady and consistent contributions toward your retirement savings are crucial when it comes to ensuring you have enough saved when it comes time to bow out from the labor force. Most importantly, it allows you to maximize the remarkable effect of compounding.

In other words, compounding is earnings on earnings. It has a snowball effect, especially in a tax-deferred account like a 401(k) or traditional IRA in which tax on profits is postponed.

The returns you earn on your investments are reinvested, and they yield more returns. They’re then reinvested, which produces even more returns, and so on. But the earlier you start saving, the greater the compounding effect.

Budgeting mistake: being too aggressive

The general rule you should follow is that you’ll need to replace about 80% of your pre-retirement income to enjoy the same standard of living you had before retiring. But this rule doesn’t pertain to everyone.

A big part of retirement planning is deciding how much you would need to contribute if you want to get as close as possible to hitting your goals later on in life. If you’re too conservative, you may not have sufficient funds.

If you’re too aggressive, it might cost your current financial situation, leading you not to having enough finances in the present. This could result in you being tempted to dip into your retirement savings earlier than expected, which will end up costing you a 10 percent penalty.

Budgeting mistake: holding onto an expensive home

Even if you can count yourself among the lucky retirees who enter retirement mortgage-free, owning your own home is still pricey. Not only will you have to deal with insurance and property taxes, but you should also think about the cost of maintenance.

A typical homeowner tends to spend around 1 to 4 percent of their home’s value on upkeep every year. But if you’ve owned your home for more than 30 years, you can count on hitting the higher end of that spectrum.

A more suitable solution would be to downsize to a smaller house or apartment or something that’s simply less expensive to maintain.

…If you’re looking for more great tips on how to avoid budgeting mistakes, you should check this book out! This New York best seller published in 2018, helped more people regulate their finances and live better even if they’re not the richest peeps on Earth. The Truth About Your Future: The Money Guide You Need Now, Later, and Much Later is available at the extraordinary price of $10 for the paperback edition. 

Budgeting mistake: financially supporting your adult children

This is one of the biggest budgeting mistakes many people make. A study done in 2022 showed that half the parents with an adult child in our country help them with some sort of financial support.

26 percent of them said that they’ve had to give even more since the beginning of the pandemic. Moreover, 62 percent of adult children that still live with their parents don’t contribute to any of the household expenses.

On average, individuals who financially support their adult children give them about $1,000 monthly for expenses like food, rent, health insurance, cell phones, and tuition.

That same study concluded that parents who still work and support their adult children pay about 23 percent more on their kid’s expenses than they do contribute to their retirement savings. The truth is that many people sometimes jeopardize their retirement by giving their children money, which tends to drain them.

Budgeting mistake: retiring before you’re vested in a 401(k)

Vesting in a retirement plan like a 401(k) means taking ownership of the funds in the account. Even though you own 100 percent of the funds you contribute to your plan, employer contributions are different. As the years pass, you own more of your account.

So when you’re 100% vested, you own 100% of the funds in that account. At that point, your employer can’t take back the money, no matter the reason. Nevertheless, you’ll lose the employer contribution to your 401(k) plan if you quit your job before you’re vested.

There might be reasons outside your control that force you to leave a job early before you’re fully vested. But voluntarily leaving before you own all of the funds in your account means leaving money behind.

So if you’re in a position where you have to leave your job, think about how much you’re vested so that you don’t miss out on those savings.

We hope you found this article on budgeting mistakes helpful and informative. Make sure to leave us a comment below if you have any more great tips for our readers!

And if budgeting mistakes have been on your mind, we highly recommend you also read: 8 Best States to Retire With Under $1 Million Saved.