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The average person age 65 or older spends $61,432 annually Federal Reserve Bank of St. Louis. But for more frugal-minded people, the goal is to cut costs in order to grow a retirement fund for as long as possible.
Although being budget conscious has its merits, there are also some common mistakes that frugal retirees make in an effort to do better financially. Want to make sure you’re not making the same mistakes? Here are some of the top things that frugal retirees may be doing wrong with their money.
1. They believe that frugality equals financial security
Living a frugal lifestyle can increase your wealth, but you’ll want to think about your money in the long term.
“Many (retirees) confuse frugality with security, when in reality the more frugal you are with your retirement savings, the more aggressive you can be with your savings in the form of required minimum distributions (RMDs),” said D’Andre Clayton, co-founder of Retirement. Clayton Financial Solutions.
If you don’t take your RMDs on time, you may be charged a 25% excise tax on any amounts not distributed. This tax is reduced to 10% if you make a withdrawal within two years of the required date.
2. They skip insurance
Being too frugal can lead to underinsurance. This may harm retirees in the long run.
“Many times, frugality is associated with very little insurance and great risks,” Clayton said. “If your goal is to accumulate cash for your family, insurance is a more intelligent way to cover risk. Refusing to spend on health and quality of life, such as skipping dental visits, etc., will only be more costly in the future.”
3. They avoid taking too many risks
Investing is a common way to grow and maintain wealth, but it is not without risk. Some frugal retirees may be so risk-averse that they don’t take risks, which sometimes limits their ability to build financial stability.
One way frugal retirees demonstrate their aversion to risk is by not investing. Instead, they can keep their money in a low-interest account. The stock market is risky in the short term, but over time it has seen overall historical growth and higher returns than savings accounts.
4. They don’t invest in their home
Some retirees will refuse to invest in their home to save money.
“Sometimes frugal retirees don’t repair their homes, which can lead to big problems. Sometimes they refuse to update their home, which reduces its value when sold,” said Melanie Musson, a finance expert. Quote.com. “Look at the value when spending money. If you maintain your home, you can spend money, but you still retain its value. If you update your home, you can increase its value. It’s not a loss; it’s an investment.”
5. They are afraid of the wrong things
Obviously, with economic uncertainty comes a lot of financial stress. But some retirees are frugal because they are afraid to spend money, even when procrastinating would create bigger problems.
“The biggest mistake frugal people make is usually not realizing that they have created false fears,” Clayton said. “Your longevity risk is much greater than IRMAA, the higher taxation of RMDs and the order of returns. You need to spend money with purpose rather than hiding money with no purpose. Planning is only important if there is a purpose involved.”
There is something to be said for assigning a value to every dollar. You can always make changes based on economic and other factors.