As a financial advisor, I mostly focus on getting people to do all they can to save more, invest early, stay invested for the long run, get their wills and trusts in order, and build wealth to meet and exceed their life and retirement goals.
But as Americans are living longer, I also see a rising number of seniors running out of money while they are in retirement; where seniors, who’ve lived pretty good lives and responsibly saved for retirement, watch their saving’s reservoirs slowly, but surely, run dry through a combination of wealth mismanagement, unsustainable lifestyles in retirement, exorbitant medical and long-term care expenses, a steady rise in living expenses, and so on. And I’ve seen this “going broke in retirement” happen to people across all economic backgrounds, including those who lived really well and even had rather successful careers.
According to a recent survey from the “Transamerica Center for Retirement Studies”, the most frequently reported retirement worry is outliving savings and investments. Across all ages, 44% of the survey’s respondents cited this concern, and 41% of all retirees claim the same fear. Additionally, 47% of retirees don’t think they’ve built a nest egg that’s large enough to last through retirement and are waking up every day with financial worries on their minds. Not something I want my listeners to go through.
So I want my commentary today to serve as a warning, to get you to NOT DO certain things that could make you run out of money in retirement. Some of these points come from Kiplinger.com.
- You abandon stocks
One of the first ways people run out of money is when they stop growing their retirement savings to keep up with inflation, typically by abandoning stocks and putting all their money in CDs or bonds, and that’s not very wise. So while we all know stocks can be risky and stock portfolios can go through wild swings from time to time, getting completely out of stocks is a mistake because, without stocks, your portfolio doesn’t really get the growth it needs through those 20 to 30 years of retirement. So talk to your financial advisor about upping your stock allocation to at least 20% or more during retirement, in order to outpace inflation and help maintain your lifestyle.
- You invest too much in stocks
How about the flip side of what I just said, and that is investing too much in stocks, especially for people in retirement without jobs, without a steady paycheck? You don’t want to overdo your stock allocation, especially if you depend on it for withdrawals because a serious crash like the one in 2007-2008 could really wipe out your portfolio. You’ll need enough fixed income in the portfolio to tide you over until the market rebounds, so consider dialing down your stock allocation.
If you’re not comfortable doing this yourself, consider investing in target-date mutual funds that are designed to reduce your exposure to stocks gradually over time as you approach—and pass—your target date for retirement. If you have a reasonable amount put aside, get some professional advice to make sure you get the optimal allocation.
- You spend too much
Did you know nearly 46% of all retired households spend more annually in their first two years of retirement than they did in the year just before retiring? That’s a big red flag because NOT sticking to a budget and spending too much too soon are surefire ways of running into financial trouble a few years down the line. So make sure you curtail your expenses to factor in lost earnings and watch your spending like an overzealous hawk.
- You rely on a single source of income
This sounds obvious, but multiple income streams are always better than one, especially in retirement. But 61% of all retirees have just one income source, Social Security, and 44% of retirees fear that Social Security will be reduced or will cease to exist altogether in the future. I think the best you can say about Social Security is that the payment will be good for the rest of your life and will slowly go up with inflation.
So you’re better off supplementing that Social Security paycheck with a pension and self-funded retirement accounts, such as 401(k)s and IRAs, plus interest and dividends from your investments, so you have a more stable and diversified financial base to rely on throughout your retirement.
- You get sick
As you age, your health is bound to deteriorate, and getting proper care is expensive. According to a 2015 report from the Employee Benefit Research Institute, a 65-year-old man would need to save $124,000 to have a 90% chance of affording his health-care expenses in retirement that aren’t covered by Medicare or private insurance. So, do all you can to cut health-care costs in retirement by considering supplemental Medi-Gap and Medicare Advantage plans, and reviewing your options every year.
Long-term care bumps up the bill even more. The need for long-term care insurance is controversial, but, in some circumstances, it can help cover costs to make it affordable. As many of you know, long-term care is expensive so have an analysis done to determine whether you can self-fund your long-term care needs with the money you already have. Long-term care may become more affordable if you take a reduced benefit and fund the rest from your portfolio. Those trade-offs can be figured out with a good analysis.
- You don’t consider taxes
Don’t forget to factor in taxes when creating your retirement budget, so understanding the tax situation in the state you live in will make a big difference. I guess that’s why so many retirees flock to Florida, Arizona, Alaska, Georgia, and Nevada, five of the country’s “10 most tax-friendly” places to retire. So take a look at state-by-state guides to taxes on retirees.
- You bankroll the kids
While it’s great to want to assist your kids, put the oxygen mask over your head before you strap it onto your 20-something kid’s because financing them at the expense of your retirement security may cause huge problems for you down the road. Don’t do something that makes you a drag on your kids later on in life. Those things end very badly, so take care of yourself first.
- You get scammed
Older adults are particularly vulnerable to scam artists and fraudsters because of their presumed wealth, relatively trusting nature, and typical unwillingness to report such crimes. Even worse, between 3% and 5% of seniors in the U.S. have been victims of financial exploitation by close family members. So protect yourself.
- You live too long
As medical care advances, the median span of retirement is now 28 years, and women have to plan for even longer. That’s great news, but only if you have the money to enjoy a good retired life. So adjust your budget, downsize your expenses aggressively, relocate to an area with low taxes and living costs if you have to, and make sure your own longevity doesn’t end up bankrupting you in retirement.