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TAKE CHARGE OF YOUR MONEY: Money mistakes seniors make

Posted in Personal Finance, Retirement by Erineus on February 3, 2009

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Money mistakes seniors make

First Posted 09:28:00 01/20/2009

Filed Under: Personal Finance, Retirement

(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)

Question: My aunt is in her early 70s. She used to work as a nurse in the US but has retired here in the Philippines. We assumed she had built up some savings for retirement because she worked hard abroad for more than 30 years. So we are puzzled that today she has difficulty paying for all her medical expenses and other bills. She bought a car in cash a couple of years ago and hired a driver, but other than that we are not aware of other high-ticket items she purchased. What could have gone wrong? How can I avoid ending up like that? – Paula

Answer: Many people think that retirement would be a breeze; after all, they have earned it after working for so long. But as your aunt may have found out, retirement is not really a bed of roses if one hasn’t prepared for it.

It may be possible that your aunt has indeed saved up, but it may not have been enough or the fund was not taken care of for it to last long. This is a common mistake seniors make in managing their finances.

Below are common mistakes seniors make when it comes to managing their finances. Think about what you can do to prevent committing them.

1. Not having a retirement fund. It’s in the Filipino culture to take care of our aging parents. That is why nursing homes for the elderly are very few in the country. Most Filipinos expect their adult children to take care of them when they are old, thus they have not saved up for funding their own retirement.

The reality, though, is not all adult children have the means to support their aging parents since they may also be having a hard time supporting their own families. This is why everyone should save up for his own retirement. This may be in the form of a pension fund or a do-it-yourself investment portfolio.

2. Not maximizing the potential gains of a retirement fund. Put simply, this means not investing your retirement fund well before you retire such that you miss out on potentially higher gains.

For instance, putting all of one’s savings in a savings account will yield only about 0.75 percent interest per annum. Contrast that with a special time deposit which could earn you about 6 percent per annum in five years. Even a retail treasury bond may yield 8 percent in three years’ time. Bonds and stocks and pooled funds (unit investment funds and mutual funds) may even earn you more depending on the market.

3. Not adjusting investments as retirement looms. Ideally, when you are nearing retirement, you should shift your investments from risky assets (such as equities) to less risky ones. As high risk investments may earn you more but may also make you lose, you can’t afford to put your entire retirement fund in peril so close to retirement age.

When you are young, you can take on more risks in investing by exploring investments that may give you a higher yield. You will have enough time to ride out the market volatility and recover any losses. Then be more conservative and protect your capital as you see retirement in the horizon.

4. Being asset-rich but cash-poor. Your aunt, for instance, has a car, but has difficulty paying her regular bills. Would it not make better sense to let go of the car so she can buy her medicines and pay for her living expenses monthly?

For some seniors, liquidating assets may be a good move to fund living expenses. Put cash in more easily accessible investments such as bank deposits.

5. Overspending. Living it up sounds so wonderful at retirement, but seniors must recognize that money will dry up with no income coming in. This is why one must live within his means. Live simply and make your retirement fund last longer.

6. Having inadequate insurance. It is during one’s sunset years that health care and medical bills rise. So it is just right that one should avail of health insurance while still young. In that way, you will be protected and new chronic illnesses (such as hypertension) cropping up afterward will still be covered in old age. Make sure you have health insurance, disability insurance, and accident insurance.

7. Not having guaranteed income. To ensure a worry-free retirement, one should consider having a steady guaranteed income stream even during retirement age. And it would be best if this income stream can beat inflation, meaning, it would earn at a rate higher than the inflation rate. Examples of such income sources would be money market investments and real estate rentals. With these, money would still come in even if you’re not working and toiling in an office eight hours a day.

Or if you still can, consider working even part-time. Aside from keeping your mind sharp, a job at retirement age will give you income that could help you with your day-to-day expenses.

(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )

*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader’s reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.

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First Posted 09:28:00 01/20/2009