Why Many Retirees Outlast Their Savings
10,000 baby boomers turn 65 every day and as they count down to retirement, they’re faced with the reality of their prior financial decisions as well as the fears of the retirement phase of life. Retirement fear is outliving savings, and many aren’t confident they will be able to retire with a comfortable lifestyle and most don’t believe they are stacking up a large enough retirement nest egg.
You have to face your fears. Before you start your retirement journey, learn more about the common reasons why some go broke in their golden years. More importantly, learn what you can do now to avoid that fate.
Live Too Long
Many people can live in to their late 80’s with reasonably good health. They’ve far outlived their parents. With good planning and careful spending, they have enough money to live comfortably. That may not be the case for the unprepared as living a long life may actually be a financial liability.
The good news is that people are living longer than ever before, so it’s possible one needs to plan for at least a 30-year retirement. People have to start looking and plan for a longer life and longer retirement as a real possibility.
Spend Too Much
We all tend to spend too much, before, and probably during, retirement. Retired households can find themselves spending more annually in the first few years of retirement than they did before retiring. Extra time can mean extra spending.
Ideally start preparing a budget prior to entering retirement. It’s critical to help you understand how to live within your means and not run out of money. Add up your monthly expenses. Separate these expenses into two groups: non-discretionary which is the must haves and discretionary which is the choice spending like wants. Tally up all sources of income other than your investment portfolio, such as Social Security, pensions, salary or real estate. Finally, subtract your expenses from your income to see what your budget should be.
Rely on a Single Source of Income
Approximately 75% of workers will rely Social Security as the primary source of income in retirement. But, at the same time, nearly half of American workers fear Social Security will be reduced or cease to exist by the time they retire.
Regardless of your view on Social Security, it alone probably won’t be enough to see you comfortably through retirement. Having multiple income streams is the smartest game plan for retirees. Use a mix of a pensions, 401(k) from your job; your own IRAs (Roth or traditional) and other sources like annuities and cash-value life insurance can provide either lump sums of cash or steady payouts, depending on the vehicle and structure.
People may plan on working in retirement because of financial reasons. They plan on staying healthy and sharpening their job skills to keep working in their retirement years. Sometimes that is not possible. What if you can’t keep working? Health issues can strike at any time, and changes to your employment status resulting from downsizing, business failures or layoffs are always a risk to consider. Most workers do not have a backup plan for retirement income if they are unable to work before their planned retirement. That is a problem.
What to do? Save aggressively, keep an emergency fund and have insurance to ensure your coverage is adequate to cover those costs.
Cutting costs in retirement is important, but insurance might not be the best place to do it. Adequate coverage is essential to prevent a devastating illness or injury from wiping out your finances.
Medicare is a good start. But don’t forget about other forms of insurance. As you age, your chances of having a disability, a chronic or critical illness go up dramatically. There are going to be gaps and holes in the health insurance that would need to be met but these times also bring in new expenses into the household. Where is that money going to come from? Supplemental insurance policies or the new Living Benefits insurance is a way to hedge that risk and have bridges of capital during that time to cover the financial costs.
Stocks can be a risky investment. Not far removed from two brutal bear markets, many have shunned the idea of having stocks as a large part of the retirement portfolio. It’s scary to watch your accounts shrink as you head into retirement, and the typical emotional reaction may be to pull all of your money out of stocks.
That would be wrong. You’ll likely need at least some of your savings in stocks throughout retirement for diversification and growth potential. For most people, stocks should account for anywhere from 40% to 60% of their portfolio in the years just prior to and after retirement, with the rest invested in bonds and cash. Where you fall on that range depends on your personal tolerance for risk, how much you expect to rely on your portfolio for income, and your anticipated life span. You have to have some opportunity for growth that will outpace inflationary pressure on purchasing power.