Facing the fear of running out of money in retirement
Retirement is a major milestone that brings many life
changes. One thing that doesn't change for most
people: the fear of running out of money. In fact, one
of the most frequently reported retirement worries is
outliving savings and investments. And interestingly,
this is a concern across all ages – many don’t think
they’ve built a nest egg large enough to last through
Now is the time to face your fears. Yes, there are a lot
of ways you could go broke in retirement, but many
can be averted with careful planning. Here are seven ways you could run out of money in retirement
– and ways to avoid them.
You could go broke in retirement if:
1. You abandon stocks
Yes, stocks are risky. Just look at 2020 as an
example. We saw an end to the longest bull-market in
history, two market corrections, a legitimate bear
market and then a spectacular bounce from the
bottom. And all that happened in a single year. But if
you’re retired, you might have been inclined to move
your money out of stocks altogether and instead focus
on preserving your wealth.
But that might have been a mistake.
Without stocks, you might not get the growth that you
need. You need your money to continue to grow
through those 20 to 30 or even 40 years of retirement
to outpace inflation and help maintain your lifestyle.
2. You spend too much money
This one seems so obvious, but all of us are guilty of
making this mistake (whether or not we’re retired).
And according to the Employee Benefit Research
Institute, almost half of retirees spent more annually in
their first two years of retirement than they did just
before retiring. So for retirees on a fixed income, this
is a problem, making budgeting more important than
3. You abandon insurance
Sure, eliminating costs in retirement is a good idea,
but eliminating your insurance might not be one of them.
In fact, having adequate health coverage is essential
to helping prevent a devastating illness from wiping
out your retirement savings. And don't just think about
health insurance either.
Whether you want to admit it or not, our chances of
having a car accident increase as we get older. And
one car accident-related lawsuit could drain your
4. You plan on just one source of income
In retirement, having multiple income streams is
almost always better than just one. Think about this:
many retirees consider Social Security to be their
primary source of income, but do you worry that Social Security will be reduced or cease to exist in the
future? And many retirees rely on pensions as a
source of income, but how secure might that be? Or
are you counting on a big inheritance?
But when you include each of the above income
streams are combined together along with what you
saved for retirement, in 401(k)s and IRAs, then you
have more stable and diversified income streams to
rely on in your retirement years.
5. You forget about taxes
Ok, maybe this mistake won’t make you broke, but
without a smart withdrawal strategy you will end up
losing more than you should. Maybe a more tax efficient way might be to draw down the principal from
maturing bonds and certificates of deposit first, since
they are no longer bearing interest. Then maybe sell
from your taxable accounts, for which you only have
to pay the capital-gains tax and end with withdrawing
from your tax-deferred accounts.
6. You don’t account for where you live or vacation
Where you live impacts what you pay in taxes big
time. That's why so many people move to Florida and
Arizona after they retire. Besides the sunshine, both
states are tops when it comes to offering more tax friendly environments for retirees.
But, if you’re like most people who think about where
to live, you’re also probably imagining traveling during
your retirement years. But before you book your next
five trips, you must make sure your finances can
handle your trips because seeing the world isn’t
To plan your retirement vacations, you can do a
couple of things to better afford your travels: either
increase your spendable income (but be careful here,
especially in the first few years of retirement) or you
can reduce your travel expenses (duh).
7. You rely exclusively on bonds
In today’s low- (or no-) interest world of bank
accounts, increasing income can be a huge
challenge. You either risk your savings in the stock
market, which has a low dividend yield of about 1.5%,
or you go into bonds.
Except bonds might well be headed for trouble. If
interest rates finally rise from today’s historical lows,
which is not likely, bond values will decrease – maybe
even substantially. You could end up with a big loss
after just a small increase in rates.
Your financial advisor
Running out of money is a really big worry in your
retirement years. And layering on the unpredictability
of investing, you might ask yourself how you prepare
your retirement portfolio for all of it? Well, one major
key to successful planning for your retirement lies in
following wise strategies.
Your financial advisor understands these strategies
and is a great source for information about how to
handle your money as you manage your retirement.
Your financial advisor's role is to prepare for the best
– and the worst – of anything. The world is just too
unpredictable to do less.
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This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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