5 Money Habits That Quietly Drain Retirement Savings, According to Kevin Lum
Seemingly small financial decisions can all become more consequential once you leave the workforce and stop having money coming in consistently each month.
In a recent YouTube video, certified financial planner Kevin Lum talked about the five small habits that can mess up your retirement plan just as much or even more, than reckless spending. If you aren’t careful, these poor money habits can eventually drain the retirement savings you’ve worked so hard to build.
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1. Not Paying off Your Debt
Lum’s first warning is consumer debt.
“Retirement doesn't fix a spending problem. It just takes away your flexibility to fix it,” he said. When you retire with loads of debt like high credit-card balances, car loans and a mortgage, that reduces financial flexibility since you may no longer have regular paychecks coming in to cover those monthly payments.
That’s why Lum recommends paying off your high-interest consumer debt before going into retirement and, just as importantly, identifying why the debt accumulated in the first place so you don’t fall back into debt in your golden years.
2. Keeping Too Much Money in Cash
Cash feels safe because its dollar value does not fluctuate like stocks. But Lum warns that keeping too much of your net worth in cash can negatively affect your purchasing power.
“Your real return on that money sitting in cash is basically zero,” he said. In other words, if you aren’t earning a return that outpaces inflation, your money will slowly lose purchasing power even if you keep putting money into your account.
If you keep a large chunk of your net worth in a checking account or a traditional savings account that barely earns any interest, consider high-yield savings accounts instead. Many HYSAs offer APYs that hover around 4.00%.
3. Deferring Taxes Automatically
Many retirees spend decades contributing to traditional 401(k)s and IRAs because those accounts let them delay paying income taxes. But eventually, that money has to come out. And those withdrawals are generally taxable.
Though you could technically keep deferring withdrawals until you’re 75, Lum doesn’t recommend it. This is because if you have a large tax-deferred balance that’s left untouched until then, mandatory withdrawals could increase your taxable income later in retirement. They could also affect your Medicare premiums.
“Use your low-tax window,” Lum said, which is the years after you retire but before you need to start taking required minimum distributions. During this time, your taxable income is usually lower than it was when you were still in the workforce, which allows you to withdraw money or convert part of a traditional retirement account to a Roth IRA at a lower tax rate.
4. Guessing How Much You Spend
Another bad money habit people make is not keeping track of their spending.
“If you get that wrong, everything downstream is wrong,” Lum said.
At a simplified 4% withdrawal rate, an extra $1,000 of monthly spending requires roughly $300,000 more in savings. If you have no idea how much you’re actually spending each month, you could easily run out of retirement savings if you’re not careful.
So, make sure to check your actual bank and credit-card statements instead of just guessing.
5. Selling When Markets Fall
“Make decisions before the storm, not during it,” Lum said. Put simply: Don’t panic sell during market downturns.
J.P. Morgan research has found that over a recent 20-year period, an investor who missed the 10 best days in the market saw annualized S&P 500 returns plunge from 10.6% to 6.37%. And seven of those 10 best days fell within 15 days of the 10 worst days — meaning it's a chancy guessing game, and also that you can't pin them all to market recovery.
In other words, some of the strongest gains actually happen when investors are most tempted to sell. So try not to react to every market downturn or let fear guide your decisions. There's a reason for the saying "Time in the market beats timing the market."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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