The average person who’s 65 or older spends $61,432 annually, per the Federal Reserve Bank of St. Louis. But for the more frugally minded, the goal is to cut costs to stretch retirement funds as long as possible.
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While being budget-conscious has its merits, there are a few common mistakes frugal retirees make in an effort to do better financially. Want to make sure you aren’t making those same mistakes? Here are some top things frugal retirees may do wrong with their money.
1. They Believe Frugality Equals Financial Security
Living frugally can stretch your funds, but you’ll want to think about your money in the long term.
“Many [retirees] confuse frugality with protection, when in reality the more frugal you are with your retirement savings, the more aggressive you will be with your savings in the form of required minimum distributions (RMDs),” said D’Andre Clayton, co-founder of Clayton Financial Solutions.
If you don’t take your RMDs on time, you could be charged a 25% excise tax on any amounts not distributed. This tax drops to 10% if you make the withdrawal within two years of the required date.
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2. They Skip Insurance
Being too frugal can lead to becoming underinsured. This can hurt retirees in the long run.
“Many times, frugality is coupled with being vastly underinsured and major risks,” Clayton said. “If your goal is to hoard cash to leave it to your family, insurance is a far more intelligent way of covering risk. Refusing to spend on health and quality of life, like skipping dental visits, etc., will only cost more in the future.”
3. They’re Too Risk-Averse
Investing is a common way to grow and maintain wealth, but it’s not without risk. Some frugal retirees may be so risk-averse that they don’t take chances, which sometimes limits their ability to build financial stability.
One way in which frugal retirees could display their aversion to risk is through not investing. Instead, they may keep their money in a low-interest-bearing account. The stock market is riskier in the short term, but it’s seen overall historical growth and higher returns than savings accounts over time.
4. They Don’t Invest In Their Home
Some retirees will refuse to invest in their home for the sake of saving money.
“Sometimes frugal retirees don’t make repairs to their homes, which can lead to bigger problems. Sometimes they refuse to update their home, which lowers its value when they sell,” said Melanie Musson, a finance expert with Quote.com. “Look at the value when spending money. If you maintain your home, you may 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’re Afraid of the Wrong Things
Understandably, with economic uncertainty comes a lot of financial stress. But some retirees are frugal because they’re afraid to spend money, even when avoidance leads to bigger problems.
“The biggest mistake frugal people make is typically not understanding they have placed weight in the wrong fears,” Clayton said. “Your longevity risk is far higher from IRMAA, RMDs high taxation and the sequence of return. You need to spend money with purpose instead of hiding it with no purpose. Planning is only important if it involves a purpose.”
There’s something to be said for assigning a value to every dollar. You can always make changes based on economic and other factors.
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This article originally appeared on GOBankingRates.com: 5 Things Frugal Retirees Are Doing Wrong That Cost Them Thousands
