Charles Dickens understood budgeting quite well. In David Copperfield, the character Mr. Micawber notes:
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
You likely will never fully understand this simple truth until you are retired and the income flow is suddenly restricted. Working more is not an option. Borrowing becomes dangerous. The result, for many, is a brutal readjustment to a new reality.
How can you avoid that kind of painful adjustment? One way is to be rich, although economists have long noted that spending tends to rise in tandem with wealth. Another is to make sure that you keep a lid on debt, especially as retirement nears.
Here are four ways well-intentioned indebtedness can kill your retirement plan:
1. Fancy colleges for the kids
Yes, you want the best for your children. And your oldest got into the Ivy League! Now, consider for a moment the choice you have in front of you. You either have the income to finance that or you don’t. If you don’t, then the options become financial aid or debt.
What many middle-income parents do is raid their own retirements for the cash, in order to avoid saddling their kids with long-term debt. The problem is, you can’t borrow to fund your healthcare and living expenses in old age. Get real about the value of a college education in the context of your entire financial life now, not just your child’s future life.
2. Credit card lifestyles
Living on easy credit is one way to cover the unexpected costs of keeping up with the Joneses. Home equity lines and credit cards make everything accessible now and seem so harmless at the time.
Consider, though, two simple numbers: 7 and 18. The first number is your best possible long-term, low-risk investment return. It doubles your money in 10 years. The second is a typical credit card rate. It doubles your debts at a little faster than four years. Which side of this equation do you think is in your interest?
3. Upsizing in retirement
Most people look at their empty-nester home and try to figure out a way to reduce and spend less. While moving to a smaller place can make sense as you get older, make sure it’s not also a retirement-buster. The retirement housing industry would love to sell you a condo on a golf course that ends up cost you another 15 years of mortgage payments, plus association fees and costly insurance. Be sure you can afford it.
4. Vacation frenzy
You’ve worked hard for decades. Vacation is a time to relax and enjoy, right? Perhaps the best advice, however, is to put off that round-the-world cruise for at least the first year of full retirement. It helps to get a grip on your actual spending habits in a given year on your retirement income before you take off to the Caribbean. You can spend that year planning that great trip, which is half the fun of traveling anyway.