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Tags: cost | saving | harm | good

Cost-Saving Measures That Do More Harm Than Good

Cost-Saving Measures That Do More Harm Than Good
(Leung Cho Pan | Dreamstime.com)

Maxime Rieman By Friday, 18 December 2020 05:50 PM EST Current | Bio | Archive

Everyone loves to save money — especially post retirement. When you’re on a limited or fixed income, cutting costs can help reduce your financial burdens, extend the life of your retirement accounts and give you more liquidity for emergencies and retirement leisure.

However, reducing or eliminating certain expenses can have negative financial consequences. Whether you’ve already reduced your spending or you’re just getting started, make sure to tread carefully with the following expenses.

Read on to learn about four measures you might want to think twice about before taking in the name of saving money.

1. Reducing Your Auto Insurance

Once you hit 65, your insurance provider will likely start increasing your insurance rates. And if you’re still driving at age 85, you may see car insurance rates that are over 40% higher than what you paid at 55 years old. Faced with those kinds of rate increases, you might be tempted to switch to a liability-only insurance policy (which is quoted to be only 48% of the cost of a full coverage insurance policy) or reduce your coverage to only the bare minimum required by your state. That action could end up costing you.

Car insurance rates begin to increase dramatically at 70 because vehicle accidents, injuries and fatalities among the 70-79 age range also begin to increase compared to those aged 60-69, according to a 2017 report by AAA. And for those aged 80-89, the rate of involvement in accidents per 100 million miles driven nearly doubles compared to the 60-69 age range.

Your auto insurance needs only increase once you retire. Unless you plan to cut up your license and sell your car, you need more coverage than you did when you were aged 30-70, not less. Instead of switching to a plan with less coverage, a better option would be to shop around for a better price on car insurance.

2. Canceling Your Homeowners Insurance After You’ve Paid Off Your Mortgage

Depending on when you purchased your house and the terms of the mortgage, you may be making the final payments at or around the time you retire. As most mortgage lenders require you to have homeowners insurance coverage, paying off your mortgage technically opens you up to the option of doing a cost–benefit analysis and deciding whether or not to keep your home insurance. We’d advise keeping it.

Costs to recover and repair damage to your home outstrip multiple years of homeowners insurance payments. Take wind and hail recovery, for example, which make up around one-third of all homeowners insurance claim losses. According to HomeAdvisor, the national average cost to repair wind and hail damage is over $8,600. Yet the national average homeowners insurance payment is under $1,500.

If your homeowners insurance is more expensive than the national average, you should anticipate your recovery costs will also be more expensive for common perils covered under your insurance policy. You may have the funds in your retirement to pay out of pocket for some home expenses, but major repairs and recovery can be devastating to families on a fixed retirement income.

3. Tossing Your Credit Cards

Eliminating your debts post retirement is great. Some retirees may be ready to cut their use of credit cards and go all cash to avoid accumulating debt. However, credit cards are still beneficial even when you’re on a fixed retirement income, and using them responsibly can help you stretch your dollars even further.

Most credit card companies offer benefits for card usage, such as cashback incentives for different types of purchases. When you pay off your credit card balance at the end of each month, you get all of the benefits and none of the debt-laden downsides associated with carrying a balance.

Some credit cards are better than others for retirees. If you don’t already have one, consider a credit card that offers benefits or incentives for travel-related expenses, such as airplane tickets, hotels and rental cars. Free of other restrictions like work and children, you’re far more likely to travel once you retire.

4. Pulling Your Investments

In years past, financial advisers often recommended that your stock portfolio allocation should be 100 minus your age. For example, a 40-year-old would be advised to have 60% of his or her portfolio in stocks, while a newly retired 65-year-old would have 35% invested in the market. This makes sense given the stock market is great for long-term investments, but its short-term volatility is poorly matched for someone who relies on that money for day-to-day survival.

The 100-minus-your-age advice was based on lower life expectancies. The average life expectancy for baby boomers is much higher than it was for previous generations. Consequently, you’re going to need more money to get you through retirement. To help you meet that goal, many financial advisers now recommend increasing that formula to 110 or 120 minus your age (or 45% to 55% in stocks for someone aged 65).

Keeping more money in the stock market helps you increase the earning potential of your retirement accounts, which is important if you live 20 to 30 years beyond retirement.

Working on a budget before retirement will help you shift more money to areas where you’ll need it most, such as emergency funds and retirement savings.

Once you retire, you’ll probably need to make additional cuts to your spending to help extend the life of your retirement accounts.

Any cuts you make should be done with care; not all spending is frivolous, so make sure you properly weigh the long-term benefit of each expense before you eliminate it.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.

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Working on a budget before retirement will help you shift more money to areas where you’ll need it most, such as emergency funds and retirement savings.
cost, saving, harm, good
Friday, 18 December 2020 05:50 PM
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