Are you concerned that your retirement savings won't last? You're certainly not alone. A 2013…
Like many retirees, you may be concerned about going broke in retirement. This could leave you in a bind. There are no “retirement loans” you can take out, and at that point you may not want or be able to go back to work in a job that could make a meaningful difference in paying your living expenses.
That’s why it’s crucial to plan ahead of time and be careful how you manage your savings, possibly with the help of a reliable financial advisor. No matter how well you plan, sometimes life throws unexpected curves, and there’s no avoiding them. But at least you can arrange your finances to make the best of whatever comes.
Here are some ways you could end up broke in retirement.
1. You invest too conservatively. For a long time, the conventional advice to retirees was to put their savings in safe investments like bonds, CDs, and savings accounts, in order to preserve their capital. This advice may have worked better when interest rates were relatively high.
But with interest rates having stayed at historic lows for the last few years, and people living much longer today, these safe investments will not generate enough growth to last through a 20- to 30-year retirement for most people. Instead, many financial specialists recommend an allocation of 20% to 50% in stocks for most retirees. You will need to decide for yourself what percentage you are comfortable with.
Yes, stocks are volatile. In the first two months of this year, many stocks lost 30% of their value. But remember that you’re investing for a longer horizon – funds you will need 10 or 15 years down the road.
2. You invest too aggressively. You don’t want to pile it all into stocks, however. Funds you’ll need immediately, or just a few years from now, should be in conservative accounts.
If you put this money in stocks, the risk is that you’ll need to withdraw the funds while the market is in one of its inevitable downturns, resulting in your having less to spend than you were counting on. So you’ll have to withdraw more, and your savings get depleted at a faster rate than you planned.
Many advisors suggest a “bucket” approach: put money you’ll need sooner in more conservative accounts, and keep funds intended for further out in stocks and mutual funds. As you go through retirement, you transfer money from the far-term buckets into the near-term one.
3. You draw down your savings too fast. It’s good to have a financial plan and budget while you’re in retirement. It’s also good to have spending discipline, so that you can stick to your budget and not overstretch it. If you look like you’re starting to fall short, you can look for ways to cut expenses, or bring in extra income, such as working or selling unneeded items.
Many retirees spend on luxury items that they didn’t have time to enjoy while they were working, like a boat, RV, high-end automobile, or even a vacation home. If your budget allows for that, that’s great. Just be aware of the recurring costs such as taxes and maintenance. Another idea is to rent instead of buy.
4. You plan to continue working. As we mentioned before, the majority of retirees end up leaving the workforce earlier than planned. If your retirement plan includes continuing to work, you might want to reconsider. You simply can’t count on being able to continue in the same position you have.
The good news is there are many other options you can look into. This includes everything from finding a part-time position in your neighborhood, to starting an online business, to leveraging your skills and experience into a consulting job.
5. You need extensive medical treatment. Healthcare is one of the biggest retirement expenses for most retirees. According to the Employee Benefit Research Institute in 2013, a man over age 65 who wanted a 90 percent chance of meeting his healthcare costs would need $122,000; for a woman, the figure was $139,000.
Medicare only covers about 60% of healthcare costs, and there are premiums and co-pays associated with it. The rest is made up by private and retiree health insurance and out-of-pocket. This figure is likely to get worse in the future, as Medicare funding is facing challenges and many employers are cutting back on retiree health insurance.
Healthcare expenses are largely outside of your control, but you’ll want to do what you can to stay healthy. You’ll also want to carefully investigate the various healthcare options available to you, and revisit them regularly.
Particularly, you will want to sign up for Medicare during your eligibility window; failure to do so permanently increases your premiums, unless you are continuing to work and are covered by your employer’s health insurance. You’ll also want to look into long-term care insurance and consider whether it’s right for you.
6. You take on your children’s expenses. About 706,000 senior households are carrying student debt, and in 2013 adults age 65 and older had $18.2 billion in student debt, according to the Government Accountability Office. While most seniors with student debt took out loans for their own education, approximately 18% of federal educational debt held by seniors originates from loans taken out for children or grandchildren.
It can be hard to turn down a loved one’s need for help with higher education, a down payment for a home, or unexpected financial emergencies. But you have to realize that if you don’t focus on your own financial health in your later years, you might end up becoming a burden to your kids at some point.
7. You get cheated. Scams are unfortunately on the rise. Seniors are a particularly attractive target, because many live alone and are isolated, and many have substantial savings. Do what you can to protect yourself from scammers. Remember that many scammers are experienced professionals and highly skilled at getting you to separate yourself from your money.
Also keep in mind that not all scams are perpetrated by total strangers. In the majority of instances, the victims were acquainted with the perpetrator: someone in church, a fellow club member, and even a close relative.
Also keep yourself from being cheated in your investments, by paying unnecessary fees. While these are not likely to leave you broke, investment fees and management fees charged by banks and investment companies can quickly add up and eat into your savings. You’ll want to read the terms of each account and pay attention to what you’re being charged. With many options, you can look around to find the best rates.