While retirement is a major milestone that brings many life changes, there is one concern that doesn't change for most people: the fear of running out of money during this stage.
According to the Transamerica Center for Retirement Studies, the most frequently reported retirement concern is outliving savings and investments. Across all age groups, 51% of respondents cited this concern, and 41% of retirees claimed to have the same fear. Additionally, only 46% of retirees believe they've built a nest egg large enough to last throughout their retirement.
To take control of your retirement years and prevent this fear from becoming a reality, now is the time to consider a dozen ways you could go broke in retirement included below and learn how to avoid them. Some of these may be averted through careful planning; others you have little control over. However, you can prepare your finances to make the best of whatever may come.
- You abandon stocks
Stocks can be risky. For example, the Standard & Poor's 500 Index, a benchmark for many investors, experienced several wild swings in 2020. Therefore, once you're retired, you might be inclined to move money out of stocks altogether and instead focus on preserving your wealth.
But that could be a mistake. Without stocks, you might not get the growth that you need. Ideally, you want your money to continue to grow through those 20 to 30 years prior to your retirement to outpace inflation and help maintain your lifestyle.
- Investing too much in stocks
While it might not be prudent to abandon stocks, neither is having too much in stocks because of the market's volatility.
If you're hesitant to make portfolio adjustments, consider target-date mutual funds instead. These funds are designed to reduce exposure to stocks gradually over time as you approach (and surpass) your target date for retirement. Not all target-date funds are the same, even if they include the same retirement target year as part of their names. Be aware of specific funds' expenses and asset-allocation strategies to ensure they are affordable and fit your needs.
- You live longer than expected
More time to enjoy the life you love is a joy; trying to afford it could become challenging. According to the Transamerica Center for Retirement Studies, current retirees expect a long retirement with a median of 28 years. Moreover, 41% of retirees expect their retirements to go on for more than three decades. What’s more, women must plan for an even longer life expectancy. According to the Centers for Disease Control and Prevention, on average, a man aged 65 can expect to live to age 83, while a woman aged 65 may reach 85.5 years of age.
Given these facts, remember to plan for a long life as you save for retirement. If it starts to look like your nest egg will come up short, make sure you adjust your budget. Some of the many alternatives available to accomplish this could include downsizing your home or finding ways to make extra income, such as starting an encore career.
While it may seem a bit obvious, most of us–retired or not–are guilty of overspending and could benefit from a reminder to avoid the temptation. In fact, according to the Employee Benefit Research Institute, nearly 46% of retired households spent more annually in their first two years of retirement than they did just before retiring.
In addition, retirees on a fixed income are particularly vulnerable to the ill effects of not committing to a budget. Thus, for retirees, budgeting is more important than ever.
- Relying on a single source of income
Life is unpredictable, which makes multiple income streams better than a single one, especially as you prepare for retirement.
A pension, which 42% of retirees use as a source of income, or inheritance most likely can't stand alone to support you through retirement. But when you put them all together, along with your self-funded retirement accounts (such as 401(k)s and IRAs), you have a more stable and diversified financial base to rely on throughout your retirement.
- You are unable to work
Another good reason for needing plenty of savings and multiple streams of income to support you in retirement is that you can't count on being able to bring in a paycheck if you need it. While 51% of workers expect to continue working during their retirement, only 6% of retirees report working in retirement as a source of income.
Being able to work is not always up to you. In fact, according to the Transamerica Center for Retirement Studies, 60% of retirees left the workforce earlier than they anticipated. Of these retirees, 66% went into early retirement because of employment-related issues, including organizational changes at their companies, losing their jobs (even with severance packages or agreements), and taking buyouts. Moreover, health-related issues, either their own ill health or that of a loved one, were cited by 37% of respondents. In short, only 16% of respondents retired early because they felt they could afford to do so.
- Suffering from ill health
As you age, your health is bound to deteriorate, and getting proper care is expensive. According to a report from the Employee Benefit Research Institute, a 65-year-old man would need to save $68,000 to have a 50% chance of affording his healthcare expenses in retirement (excluding long-term care) that aren't covered by Medicare or private insurance. To have a 90% chance, the same man would need to save $124,000. On the other hand, a 65-year-old woman would need to save $89,000 and $140,000, respectively. This goes to show that it is crucial to make sure you're doing all you can to cut healthcare costs in retirement by considering supplemental Medigap and Medicare Advantage plans and completing an annual review of the options at your disposal.
Long-term care bumps up the bill even more. In the US, for example, the median cost for adult day healthcare is $1,473 a month, while the median cost for a private room in a nursing home is $7,698 a month, according to Genworth. No wonder 44% of retirees fear declining health that requires long-term care, and 31% fear cognitive decline, dementia, and Alzheimer's disease. In preparation for these possible expenses, consider getting long-term care insurance to help cover those costs and use the tactics explained in this article to make it affordable.
- Withdrawing retirement money the wrong way
Not having a smart withdrawal strategy in mind could cost you. A more tax-efficient way to go might be to draw down the principal from your maturing bonds and certificates of deposit first, since they are no longer bearing interest.
Then, sell from your taxable accounts, for which you only have to pay the capital-gains tax. Finally, withdraw from your tax-deferred and Roth accounts. Following this order will make everything more manageable.
- Not considering taxes
Tax-smart decisions extend beyond your drawdown strategy. Where you live has a major impact on what you pay in taxes. Keep state and local taxes in mind (especially sales taxes, property taxes, among others) when planning your budget.
- You bankroll your kids
Financially supporting your kids through thick and thin may not be the best course of action as you prepare for retirement. While you may feel obligated to assist your children by paying for college, contributing to the down payment of their first home, and covering their emergency or unforeseen costs, in the long run, helping them at the expense of your retirement security may cause bigger problems for everyone involved.
Be mindful about that; you have to take care of yourself first, so you can help your kids later.
- You are underinsured
Cutting costs in retirement is important but scrimping on insurance might not be the best way to go about it. Adequate health coverage, for example, is essential to prevent a devastating illness or injury from wiping out your nest egg. Medicare Part A, which covers hospital services, is a good start and it's free to most retirees. However, you'll need to pay extra for Part B (doctor visits and outpatient services) and Part D (prescription drugs). Even then, you'll probably want a supplemental Medigap policy to help cover deductibles and copayments, among other costs.
And don't forget about other types of insurance. Your chances of having accidents both at home and on the road increase as you get older. In fact, according to the Centers for Disease Control and Prevention, an average of 586 adults who are 65 and older are injured every day in car crashes. Review the liability coverage that you already have in your policies and consult your insurance broker to ensure that you have assessed all potential risks.
- Getting scammed
Older adults are particularly vulnerable to scam artists and fraudsters. The FBI notes that they are prime targets for such criminals because of their presumed wealth, relatively trusting nature, and typical unwillingness to report these crimes. Even worse, some perpetrators may be closer than you think. According to a study from the National Committee for the Prevention of Elder Abuse, an estimated one million older adults lose $2.6 billion a year due to financial abuse, family members and caregivers being the perpetrators 55% of the time.
This means that it is important to watch out for some common scams, including con artists pretending to be Medicare representatives who hope to collect your personal information and people selling fake prescription drugs online. Sadly, this last scam could result in handing over your credit card information in exchange for endangering your health.
Protect your Retirement
Remember that at Popular One our licensed personnel can help protect your assets and plan for retirement. Contact your Private Banker to assist you.