While retirement is a significant life step that brings many changes, one issue that most individuals have remains constant: the fear of going broke. According to a Bank of America's Merrill Edge survey, even the most affluent Americans – those with $50,000-250,000 in investable assets – are concerned about running out of money in retirement.1 In all, 55% of the 1,000 respondents polled were concerned about being broke in retirement.1 To take charge of your retirement years and keep this worry from becoming a reality, explore the 8 common reasons you could go broke in this article and learn how to avoid them.
1. You Miscalculated Your Life Expectancy.
More time to appreciate the things you love is a blessing; nevertheless, affording it may be difficult. According to the Transamerica Center for Retirement Studies, current retirees anticipate a 28-year retirement.2 Furthermore, 41% of retirees expect their retirement to last longer than three decades.2 Despite this, many individuals fail to consider this in their retirement planning. Given these realities, remember to invest for retirement while planning for a long life. If it appears that your savings will be depleted, adjust your budget. Some of the various options for accomplishing this include reducing your house or finding methods to create more money, such as starting a side job you enjoy.
2. You Don't Have an Emergency Fund.
Putting money aside for emergencies isn't only for those actively working. A single house or vehicle repair, such as replacing a roof or getting a new transmission, may be catastrophic to the budgets of fixed-income seniors who do not have money set up for such tragedies. Examine your budget and temporarily limit spending so that you may gradually build up your emergency reserve. Six months' worth of living costs is often advised, but three-plus months should be adequate for many retirees.
3. You Took a Loan From Your Retirement Fund.
Many folks in their forties and fifties regarded borrowing from our employer-sponsored retirement plans as a simple method to pay off credit cards. After all, retirement was years in the future, and the money was just sitting there doing nothing. Right?
However, borrowing from your 401(k) is an all-too-common error that you will regret in retirement. Taking a 401(k) loan can drastically inhibit the growth of your retirement savings fund and have long-term ramifications. Not only is the money you borrowed not generating interest in your account, but you've also ceased making fresh payments to pay down your debt. And, of course, no new contributions means no matching employer payments.
4. You Fall Ill
It's no secret that as we age, our health deteriorates. It's also no secret that health-care costs a lot of money. According to the Employee Benefit Research Institute, a 65-year-old man would need to invest $142,000 to have a 90% probability of covering his health-care costs in retirement that aren't covered by Medicare or private insurance.3 The situation is even worse for a 65-year-old woman who requires $159,000.3 Those figures also don't include long-term care. If you or a loved one need long-term care, the bills will increase. According to Genworth Financial, the median monthly cost for adult day health care in the United States is $1,690; a private room in a nursing home costs a median of $9,034 per month.4 Premiums can be steep, but with this reality, you may benefit from looking into getting long-term care insurance to help cover those costs.
5. You Depend on a Central Source of Income
According to the Employee Benefit Research Institute's 2022 Retirement Confidence Survey, 84 % of retirees and 86 % of employees mention Social Security as their primary source of income in retirement.5 However, Social Security will most likely not be enough to keep you comfortable in retirement. Having numerous income streams is the best strategy for retirees. You want to blend a pension, a 401(k) from your company, your IRAs, either Roth or conventional, and annuities that may offer either lump sums of cash or periodic distributions, depending on the annuity you pick.
6. You Overspend.
While it may seem self-evident, most of us–retired or not–are guilty of overspending and may benefit from a gentle reminder to resist the urge. According to the Employee Benefit Research Institute, roughly 46% of retired families spend more money each year in their first two years than before retiring.6 Furthermore, retirees on a fixed income are especially exposed to the negative consequences of not sticking to a budget. As a result, budgeting is more critical than ever for retirees. Give this approach to budgeting a try:
Step 1. Add up your monthly costs, including taxes and extras like long-term health care.
Step 2. Divide this spending into non-discretionary (must-haves) and discretionary (extras).
Step 3: Add up all sources of income other than your portfolio, such as Social Security, pensions, salaries, and real estate.
Step 4: To determine your budget, subtract your costs from your income.
7. You're Drawing From the Wrong Accounts
Let's hope early on you set up various income streams for retirement. You still need to know which funds to use when you're older and retired to reduce taxes and avoid fines.
First, draw from taxable accounts to enable your investments in tax-deferred accounts like conventional IRAs and 401(k)s to compound for as long as possible before being withdrawn and taxed. The most tax-efficient distribution strategy will be determined by the specific composition of your portfolio, your income needs, and your particular circumstances. A professional adviser can assist you in deciding when and how much to withdraw from which accounts to extend the life of your portfolio.
Keep in mind that conventional IRAs and 401(k)s financed with pre-tax money are subject to required minimum distributions beginning at the age of 712 or 72, depending on your birthday. If you fail to submit an RMD, you will be penalized severely. Furthermore, Roth IRAs are not subject to RMDs, and there are no deferred taxes to worry about because Roth contributions are paid after-tax. The flexibility of Roth's are useful in retirement when trying to control income levels from year to year while keeping taxes to a minimum.
8. You Overlook Certain Taxes.
Assume you have a retirement savings strategy that is mainly focused on federal tax regulations. But have you thought about how state and municipal taxes may affect your retirement savings? High state income taxes, state and local sales taxes, or property taxes — or a mix of all three – might quickly eat away your hard-earned money, depending on where you reside. Social Security payouts are even taxed in twelve states. Do your homework before retiring and keep friends and family in mind.
Schedule A Consultation with an Experienced Financial Advisor
We hope this week's article was helpful to you and that it will help you in your journey to retirement. However, if you feel like you need more guidance, we're always here to help. Our mission is to help you develop, implement, and monitor a strategy designed to address your situation to ensure all your investments are setting you up for a path of financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
Securities are offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.
1https://www.merrilledge.com/Publish/Content/application/pdf/GWMOL/Merrill_Edge_Report_112812.pdf
2https://www.transamericacenter.org/docs/default-source/retirees-survey/retirees_survey_2015_report.pdf
3https://www.ebri.org/content/projected-savings-medicare-beneficiaries-need-for-health-expenses-spike-in-2021
4https://www.genworth.com/aging-and-you/finances/cost-of-care.html
5 https://www.ebri.org/retirement/retirement-confidence-survey
6 https://fortune.com/2017/12/12/retirement-spending-test-drive/