9 Reasons You Might Go Broke in Retirement

Financial advisors advise starting saving for retirement from a young age. Even though you may be earning a lot less at the beginning of your career, you can use the power of compounding to your advantage and save enough money for retirement. However, as you near retirement age, you can reassess your corpus to find out whether you have amassed enough money to live your golden years comfortably or not. A sobering statistic that you may find interesting - almost 40% of retirees run out of money during their retirement.

There are several reasons why this may occur - increasing cost of healthcare, rising inflation, or unfavorable changes to policies related to 401(k)s, IRAs, income taxes, etc. You must keep track of any changes occurring in the market and minimize their impact on your retirement fund. Be vigilant and take measures to ensure your savings last your retirement. If you wish to protect your retirement savings against market volatility and exigencies, consult with a professional financial advisor who can advise you on the same.

In this article, we will discuss various reasons that may cause you to run out of money in retirement.

What are the reasons that may cause you to go broke in retirement?

There can be a number of reasons why folks are not able to stretch their savings and run out of money in retirement. Let us discuss them in detail.

1. Being trigger happy with your investments

Investing in the stock market can be a risky proposition as the market experiences ups and downs on a regular basis. If you panic and end up diluting your stocks during a market downturn, it can negatively impact your financial future as you may lose a steady source of income for the future. To counteract market volatility, you can rebalance your investment portfolio and reduce your market exposure as you start nearing your retirement age. You can reduce your stock holdings and reinvest in bonds, treasury bills, mutual funds, or other low-risk investments. That said, do not completely divest your stock investments as they can help you generate inflation-beating returns and boost your savings.

2. Overexposure to stocks

Recklessly diluting your stocks is not a great idea but neither is increasing your exposure to equity. Investing in stocks is a tricky affair at the best of times despite offering the opportunity of generating exponential returns. You may face market volatility, crashes, bear runs, and more that increase your risk exposure. Overinvesting in stocks can prove to be calamitous for your retirement savings if the market experiences a huge crash like the Great Recession of 2008 or your chosen stock takes a big dive.

You can however take some steps to mitigate the risk and safeguard your retirement corpus by following certain investment strategies such as the asset allocation by age rule. Herein, you hold a percentage of stocks equal to 100 minus your age. For example, if you are 30 years old, you should hold 70% of your portfolio in stocks; if you are 45, 55% in stocks, and so on. Further, ensure you do not overly invest in one asset class, sector, industry, or stock. Diversify your stock holdings to spread and mitigate your risk.

3. Living luxuriously or beyond your means

As per the Employee Benefit Research Institute report, 46% of retirees tend to overspend during their first two years of retirement compared to what they spent just before hanging up their boots. This may be due to a large sum of money being available to them and partly due to the loss of a steady paycheck. This tendency needs to be checked to avoid draining your finances prematurely. Moreover, ideally, you should have cleared off any debt such as a mortgage or a loan before reaching your retirement. If not, you would need to create a budget to account for the same and your monthly expenses including taxes, healthcare costs, etc. A budget would help you keep track of your expenses and use your corpus judiciously.

4. Being dependent on a single income source

Having only a single source of income is not considered wise because if you end up losing your job or your business suffers a huge loss, you would have to rely on your savings to meet your living expenses. This is not ideal. Hence, it is critical that you develop a passive income source such as dividends, rent, royalty, etc., that will allow you to meet your expenses. Financial experts advise diversifying income sources in the event that if one income source dries up, you will have other income streams that you can rely on. You can consider a mix of pension, Social Security benefits, 401k or IRA distributions, along with other investments to have multiple sources of income in retirement. You could also pick up a part-time job, work as a freelancer, or monetize a hobby of yours to boost your income.

5. Not planning for healthcare costs

With advancing age, you may need to spend a considerable sum of money on healthcare costs. If you have not taken out a medical insurance policy, medical expenses can make a significant dent in your retirement corpus. In addition, invest in long-term care as well. Due to rising longevity, you may live longer than you may have anticipated and may run the risk of running out of money in the latter years of your life. Long-term care insurance covers nursing-home care and home health care for retirees age 65 or older or those having a chronic or disabling condition that requires constant care.

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6. Neglecting tax planning

Tax planning forms a critical aspect of retirement planning. If you do not account for taxes properly, a significant portion of your retirement corpus may get drained by them. All your investments including stocks, bonds, real estate, IRAs, 401(k)s, etc., attract heavy taxes. Moreover, the state you live in has a major impact on your tax bill as each state has different tax laws concerning income tax, sales tax, property tax, and more. Consider consulting a professional financial advisor who can help you minimize your tax liability and avoid any unexpected tax bills in the future.

7. Overlooking insurance planning

Being underinsured is as bad as being over insured. Thus, you must invest in proper health coverage to meet your future health expenses. Start with Medicare, a national program that subsidizes healthcare services for people aged 65 or older. There are four parts to Medicare:

• Medicare Part A helps pay your hospital bills related to inpatient hospital stays and procedures, home health care, and care at a nursing facility.
• Part B helps cover expenses for outpatient care such as doctor visits including preventive services, ambulance services, certain medical equipment, and mental health coverage.
• Part C also known as Medicare Advantage covers costs related to insurance while traveling outside the United States as well as dental, vision, and hearing care.
• Part D helps cover the costs of prescription drugs.

That said, insurance coverage is not limited to healthcare and you can also avail of accidental insurance to increase your safety net. Take care to review your insurance coverage and ensure that you are not underinsured to avoid using your retirement savings for covering your healthcare expenses.

 8. Taking out a loan from your retirement account

Sometimes due to unannounced financial emergencies, you may have to take out a loan from your retirement account. Financial experts advise against borrowing from your retirement plan as doing so may seriously deplete your corpus. Inspite of this, almost one-third of retirement account holders tend to make this mistake and borrow money against their 401k, IRAs and other accounts. Further, you need to adhere to withdrawal rules at the time of making a distribution, otherwise, you may be liable to pay taxes and penalties that may end up having a negative impact on your retirement fund.

9. Failing to create an emergency fund

As stated above, emergencies can come unexpectedly and throw your retirement planning for a toss. This is especially true when you have retired and do not have a steady paycheck to bank upon and lack a passive source of income. Most experts suggest saving three to six months worth of expenses so that you do not need to sell your stock investments or make an early withdrawal from your retirement account. Having an emergency fund in place can offer you peace of mind and not dip into your retirement savings.

To summarize

To adequately plan for retirement, you need to consider and take into account several factors such as the current rate of inflation, taxes, whether you have passive income sources or not, healthcare expenses, buying insurance, retirement lifestyle, and more. It is critical that you plan for retirement and build a significant retirement corpus to live comfortably during your golden years of life. Take care to boost your savings by deploying tax-saving strategies and be careful when it comes to making withdrawals from your retirement accounts.

You may also consult with a professional financial advisor who will be able to guide you effectively on how to protect your retirement assets and income so that you do not end up running out of money in retirement. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.