Everyone wants to retire early but as enticing as it may sound, there’s often a lingering fear that no matter how diligently you’ve saved, your financial reserves might not be sufficient to sustain you throughout retirement.
A study conducted in 2019 by the Employee Benefit Research Institute revealed that 40% of individuals aged between 34 and 64 were projected to run out of their retirement savings. This alarming statistic serves as a stark reminder that the fear of running out of money in retirement is a legitimate concern for many.
Here are 7 most common reasons why 40% of people run out of money in retirement.
1. Not saving enough
Above all else, the paramount factor in securing a stable retirement is ensuring that you have saved enough money. Without a substantial nest egg, the prospect of a worry-free retirement diminishes significantly, leaving you with limited options other than returning to work to make ends meet.
To safeguard your financial future, it is imperative to take proactive steps as early as possible. Crafting a well-thought-out retirement plan is crucial so don’t postpone this essential task.
Start by setting clear goals and mapping out a roadmap to achieve them. Saving aggressively from an early stage allows your money to benefit from compound interest, amplifying the growth of your investments over time.
2. Not having a retirement budget
In a situation where your income during retirement is fixed, primarily derived from investments, maintaining a clear and meticulous understanding of your financial outflow becomes paramount to prevent the risk of exhausting your funds prematurely.
To ensure a stable financial future, start by developing a comprehensive picture of your monthly income. Analyze all the revenue streams that contribute to your fixed income, such as pensions, annuities, Social Security benefits, and returns from investments.
This holistic approach allows you to project the reliability and sustainability of your income sources.
You also need to have a precise knowledge of your fixed expenses. Identify essential costs that happen every month, including housing, utilities, insurance, medical expenses, and other necessities. By creating a detailed budget, you can better understand the amount required to cover these critical expenses.
3. Forgetting about inflation
When you’re living on a fixed income during retirement, the impact of inflation can be particularly challenging to handle. The uncertainty of how the inflation rate will fluctuate throughout your retirement years adds another layer of complexity to your financial planning.
Undoubtedly, saving as much as you can before retirement is a wise strategy to mitigate the effects of inflation. Building a robust financial cushion allows you to better cope with rising costs and maintain your standard of living as prices increase.
However, managing inflation risks involves more than just saving diligently. One effective approach is to strategically time when you begin receiving Social Security benefits.
Delaying your Social Security benefits can significantly enhance your financial security during retirement. The longer you wait to claim these benefits, the higher the monthly amount you’ll receive.
4. Not planning for medical expenses
As you age, medical expenses can become a significant financial concern. The escalating costs of healthcare in retirement are a genuine cause for worry, with Fidelity Investments estimating that the average retired couple might spend $300,000 on healthcare expenses after taxes in their retirement.
Facing such substantial costs, it becomes crucial to take proactive measures to safeguard your financial well-being. Budgeting for medical expenses should be a top priority in your retirement planning.
Creating a comprehensive healthcare budget allows you to allocate funds specifically for medical costs, ensuring that you have a realistic and well-managed financial plan to tackle these expenses.
Choosing the right insurance plan is also vital in mitigating the burden of healthcare expenses. Prioritize researching and comparing various health insurance options, including Medicare plans, to find one that best suits your needs and provides comprehensive coverage.
5. Not following the 4% withdrawal rule
Typically, the 4% rule serves as a widely respected guideline to determine a safe withdrawal rate from your retirement accounts each year. Adhering to this rule is considered a wise decision and it allows you to retire comfortably without jeopardizing your financial security.
Exceeding the 4% withdrawal rate could lead to potential financial pitfalls in the future. Drawing more than this recommended percentage might deplete your retirement savings faster than expected, leaving you vulnerable to running out of funds later in life.
It is crucial to exercise caution and avoid taking excessive withdrawals to safeguard the longevity of your retirement savings.
In fact, striving to keep your withdrawal rate even lower than the 4% benchmark, if feasible, is a wise strategy. By adopting a more conservative approach, you create an extra buffer to counter unexpected financial challenges and market fluctuations.
6. Not adapting to a new retirement lifestyle
Retirement brings about a distinct shift in lifestyle compared to the working years. During your career, a higher income may have allowed for indulgences like frequent shopping sprees and dining out at fancy restaurants. However, once you transition to a fixed income in retirement, it becomes essential to make adjustments to your expectations and spending habits.
Embracing a more frugal approach can help ensure financial stability during this new phase of life. While certain luxuries may need to be eliminated, it doesn’t mean sacrificing the joy and fulfillment retirement can offer. Instead, consider exploring affordable and enriching ways to enjoy your time.
Engaging in social activities that do not strain your budget can be incredibly rewarding. For example, joining a book club allows you to get into captivating stories while fostering meaningful connections with like-minded individuals.
7. Forgetting about taxes
Some of your retirement accounts were funded with pre-tax dollars, and when you make withdrawals, the government will collect taxes on that income. This applies to traditional 401(k) plans and IRAs, where your withdrawals are treated as taxable income, subjecting them to the corresponding tax rates. However, one advantage is that you won’t be subject to capital gains taxes on these withdrawals.
On the other hand, if you contributed to a Roth IRA, you’ve already paid taxes on the money before putting it into the account. As a result, when you make withdrawals during retirement, you won’t be taxed again on those funds. This tax-free aspect of Roth IRAs makes them highly appealing for retirement savings.
If you have a traditional IRA, it might be worth considering converting it to a Roth IRA, if possible. Converting to a Roth IRA involves paying taxes on the amount converted, but this can be a strategic move if you expect to be in a higher tax bracket during retirement.
By doing this, you effectively lock in your current tax rate and allow your retirement savings to grow tax-free, providing greater flexibility and financial advantages in the long run.
