In retirement, most people are worried or concerned about outliving their money. While this is a legitimate concern here are eleven ways in which you can go broke in retirement and some solutions to help avoid these pitfalls. While some of these ways to go broke you have a degree of control over, others are out of your hands totally, but regardless, there are ways to minimize these eleven ways of going broke in retirement with some foresight and proper planning.
1. You basically abandon equities in your accounts. Yes, owning equities in retirement can be risky but not owning them can be even more so. While the stock market is known to be more volatile than fixed income, it is a necessary portion of one’s retirement accounts. As people are living longer in retirement fixed income does not allow for the replenishment of capital in these accounts which in turn will provide you enough money to live on in your golden years. At a minimum 20% of your portfolio needs to be invested in equities to prevent the depletion of your capital.
2. You invest too much of your portfolio in equities. Here is the tricky part of retirement and equities, some people invest too little in them while others go too far the opposite direction and invest too much. Here there is no one size for every situation, and each person needs to do what they are comfortable with when equities are concerned in their retirement. One recommended approach is to have approximately 60% in equities as you near retirement age, shifting to 40% in your early retirement years and finally 20% later on. If you are someone who does not want to do these changes yourself and do not want the assistance of a financial planner, consider a target date mutual fund. These are funds that invest heavier in equities when you are younger and shift to fixed income as you approach retirement. All you need to do is find a fund that has low expense fees and a target date that is near the year in which you will want to retire.
3. There is a possibility that you might live too long. This is an example of one of the eleven that is outside your control, but you may be able to get a good idea on how long you might live based on your health and the longevity of people in your family. Current retirees can expect about three decades of living in retirement, and almost 40% of retirees expect their retirement to go longer than three decades. Plan on living a long time in retirement when you are in your retirement planning years and if you are retired, and it seems you will run short of money adjust your living budget.
4. Chances are you are spending too much. This is a problem the majority of people, retired or not, have in today’s society. In a recent study, about 45% of people who were retired for two years spent more in that time period than they did before retirement. People need to look at their spending once they retire and adjust it to the fact that chances are they are bringing in less income from all sources.
5. Many people who are retired rely on a single source of income. This is something that proper planning can aid you in preparing for a comfortable retirement. For most people in the US Social Security is the single source of their income once they retire. And if that is the case you may be in a position that is not necessarily desired. Based on current data if you plan on only relying on Social Security in retirement you can expect about 75% of your promised retirement benefit starting in 2035. In addition to Social Security, it is wise to save in a 401(k) plan where you are working or in an IRA. This will provide you an additional source of income once you retire. If you are lucky enough to have a pension in retirement, that can also add an additional source of income for you, but these seem to be disappearing from corporate America.
6. You are no longer able to work. While there are a lot of people doing some sort of working in retirement that is not a given for everyone. There are going to be people who are not able to work in retirement due to health reasons so the option of a small paycheck may not be an option for you.
7. You may become sick, and that is more expensive as you get older. Proper care is expensive in America and is costly the older we get. On average a 65-year-old male would need to save approximately $70,000 to have a 50% chance of affording their healthcare needs in retirement. To have a 90% chance that same male would need approximately $125,000. And females can expect to need even more in retirement as they tend to live longer than males. And these figures do not consider long-term care which is an expense above and beyond health care costs so it may be wise to consider a long-term care insurance policy or save additional funds just for that potential expense.
8. If you are lucky enough to have multiple sources of income in retirement chances are you have more than one retirement account, so it is important to access them in the correct order. And yes it does matter how you access your funds in retirement. Here you need to consider the tax consequences of the funds you withdrawal. First, do not repurchase CD’s and bonds when they mature and use those funds for a living if you can. If you are older than 70 ½, you will be required to take funds from your IRA, and 401(k) accounts called required minimum distributions or RMD’s. If you are able, sell off assets in these accounts that are no longer appropriate for your risk tolerance and age. Then sell from brokerage accounts and pay the capital gains taxes on the proceeds as that will be less than the ordinary taxes you will pay on the previous accounts. And finally tap into ROTH IRA accounts last as they are tax-free and can be passed along to your heirs.
9. We touched on this in number eight, but many people do not consider taxes in retirement. And the people that do consider tax-friendly states for retirees such as Florida which has reasonable sales tax and no state income taxes. But most importantly you should live somewhere that you can afford and is someplace you desire to live in the first place.
10. Avoid helping grown children. While this may seem to mean it is important as if you do not finance your own retirement chances are your children will be even more burdened when they have to help support you. It would be nice to be able to pay for a child’s education, but they can pay for it themselves by either working in college or take out student loans themselves. The reason is they have much more time to pay the loans off while saving for their own retirement while you do not have that luxury. Pay yourself first and always remember that.
11. Older people tend to be the target of financial scams, and that is just a cold hard fact of life. There are numerous reasons why this is the case, but it is wise to talk to your aging parents about current scams and how they are perpetrated against seniors. Like with anything a little prevention and open communication can save loved ones a lot of hurt and pain.
These are just eleven ways in which people can easily go broke in retirement and some simple ways in which you can help avoid them. While this list is not all-inclusive, it is a good starting point for anyone who is approaching or in retirement. It is never too early to plan and prepare for your own retirement so do not put it off any longer and start today.
If you need any assistance or have any questions, feel free to contact me directly or leave a comment here.