Avoid Retirement Pitfalls: How to Secure Your Financial Future

The realities of retirement can often differ sharply from what many envision. While running out of money can be a significant concern, the inability to retire at all may be even worse.

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You may encounter various challenges on your path to retirement. If you fail to prepare for life after work and live without a salary, the harsh truths of retirement may hit hard. These insights, drawn from expert consultations with GOBankingRates, could help mitigate potential disasters in your retirement plan.

Your Net Worth Might Not Matter in Retirement

You may have saved diligently and amassed a significant nest egg. However, even having $1 million might not suffice in high-cost living areas.

Many retirement savers do not accurately estimate their monthly living expenses post-retirement. According to a survey by the Employee Benefit Research Institute and Greenwald & Associates, only 38% of workers have calculated the income they’ll need monthly during retirement, noted Niles Geary, co-founder and CEO of Voyage Partners, a financial planning firm in Johnson City, Tenn. “Your net worth becomes meaningless when you retire,” Geary pointed out. “What truly matters is how much income your net worth can generate.”

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Solution: Develop an Income Plan

Don’t assume that you’ll spend significantly less in retirement. Research shows most retirees spend around 80% to 90% of their pre-retirement expenses, according to Geary. Therefore, your savings must generate enough monthly income to maintain your spending habits.

If already retired without having calculated your monthly income needs, you may need to adjust your spending. Geary suggests distinguishing between needs and wants, which can help you understand your essential costs versus discretionary spending.

“That gap has grown quite large,” he explained. By reducing unnecessary expenses, you could extend the lifespan of your retirement savings.

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Taxes Can Significantly Reduce Your Retirement Income

Retirees often underestimate the tax implications of their retirement income. “Commonly, people believe their tax rate will decrease upon retirement,” Geary said. “This is a fallacy.”

If substantial funds are saved in tax-deferred accounts like a 401(k), withdrawals will be taxed at your regular income tax rate. For example, to cover $50,000 in annual expenses, you’ll need to withdraw more to account for taxes.

Solution: Establish Tax-Free Income Sources

Accessing tax-free savings can help mitigate tax burdens and preserve more of your income. Options include funding a Roth IRA or Roth 401(k), which allow tax-free withdrawals in retirement. “Inquire with your employer about a Roth option,” Geary recommends. If unavailable, suggest adding it to your options.

Additionally, permanent life insurance policies can provide tax-free income through loans against the cash value. Consulting a financial planner can assist in determining if this approach suits your retirement strategy.

Inflation Can Affect Retirement Income Needs

When calculating your retirement income, it’s crucial to factor in inflation.

“Inflation can be subtle yet impactful,” said Marguerita Cheng, CEO of Blue Ocean Global Wealth. To maintain your current lifestyle, it’s wise to prepare for increased spending as living costs climb throughout retirement.

Solution: Invest in Equities

With rising inflation, the need for strategic investments increases. To protect your purchasing power, consider assets that offer higher returns.

“Including equities in your investment strategy is crucial,” Cheng emphasized. Even post-retirement, maintaining stocks or stock mutual funds within your portfolio is essential for sustained growth of your savings.

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The Importance of Planning for Longevity: Avoid Outliving Your Savings

Many people aspire to live a long and healthy life. However, without sufficient savings, this aspiration can pose challenges during retirement.

According to the Centers for Disease Control and Prevention, the average life expectancy in the U.S. is 77 years. The Social Security Administration adds that about one in five 65-year-olds will live beyond age 90. This suggests that some individuals may face decades of retirement without adequate financial resources.

Proactive Steps: Planning for a Long Retirement

While the future remains uncertain, a life expectancy calculator from the Social Security Administration can estimate the average years you might live based on factors like gender and date of birth. This information can help you determine how many years your retirement savings should support.

Financial advisor Geary emphasizes the need for a plan that can sustain you financially for 30 or more years. If your savings fall short, it may be necessary to postpone retirement.

Understanding Costs: Long-Term Care Can Deplete Savings

Even a sizeable nest egg can diminish quickly without a plan for long-term care costs. The U.S. Department of Health and Human Services estimates a 50-50 chance that a person who reaches 65 will need long-term care, and this type of care can be expensive.

In 2021, Genworth Financial reported the median annual cost of assisted living at $54,000. Geary noted that long-term care could easily consume $1 million for just one individual.

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It’s essential to realize that standard health insurance and Medicare typically cover only limited long-term care options. Geary warns that self-funding this care is often inadequate.

One potential solution is obtaining long-term care insurance, or alternatively, you can explore life insurance policies that offer long-term care benefits. Early applications—before age 50—can lead to lower premiums and easier approval.

Financial Readiness: Prepare for Rising Healthcare Costs

If you’re not prepared for healthcare expenses in retirement, you might face financial difficulties. Fidelity Investments estimates that a 65-year-old couple retiring in 2022 should expect to spend at least $315,000 on medical expenses, not including long-term care.

For those who have not budgeted for healthcare costs, it may become a challenge to afford necessary medical care during retirement.

Strategize: Lower Costs and Increase Health Savings

To tackle increasing healthcare costs in retirement, consider a few strategies. Working longer may allow you to keep receiving employer-sponsored health insurance. Additionally, contributing to a health savings account (HSA) while employed can help. HSAs offer tax-free withdrawals for qualified medical expenses during retirement.

Health procedures can also be more affordable if anticipated during your employment, ensuring you maximize health coverage. Consulting with insurance experts will help you evaluate options for post-retirement insurance coverage to find the best fit.

Monitor: Relying Solely on Social Security Can Be Difficult

The Social Security Administration reports the average monthly retirement benefit is $1,692. As Geary highlights, relying solely on Social Security can lead to financial strain.

Living on Social Security alone can push individuals into tough decision-making, such as choosing between medication and groceries. Geary describes scenarios in Johnson City, Tenn., where some face this challenge each month, resulting in serious concerns.

Maximize: Enhance Your Social Security Benefits

To avoid depending solely on Social Security, building savings during your working years is crucial. If you can’t create a large nest egg, refrain from claiming Social Security early at age 62, as this could reduce your benefits by up to 30 percent permanently.

Delaying your Social Security claim beyond your full retirement age can significantly increase your benefits. For instance, the maximum monthly benefit at age 70 is currently $4,555.

Facing the Reality of Retirement Boredom

Brett Anderson, the president of St. Croix Advisors, frequently hears retirees voice concerns about boredom. He notes, “They used to work five days a week, eight to 12 hours a day, and only had 52 Saturdays a year. Now, in retirement, they have 365 Saturdays, and not everyone can golf seven days a week.”

Preparing your finances before leaving the workforce is vital; however, Anderson warns not to ignore the importance of staying engaged and relevant during your retirement years.

Finding Fulfillment: The Importance of a Bucket List

According to Byrke Sestok, a certified financial planner with Rightirement Wealth Partners, those who fail to plan their leisure time in retirement may face depression and spend more than intended to combat boredom.

To sidestep this issue, Sestok advises retirees to create a bucket list of activities they always wished to pursue. Whether it’s volunteering, exercising, learning new skills, or picking up a hobby, this proactive approach could lead to a more satisfying retirement.

Rejoining the Workforce: A Common Scenario

Many retirees may find themselves back in the workforce for various reasons, often taking full-time positions. Data from the Bureau of Labor Statistics shows a notable trend—employment among individuals aged 65 and older rose by 117% over the past two decades.

Discovering Joy: Choosing Meaningful Employment

Returning to work shouldn’t be perceived negatively. Beyond the financial benefits, employment can alleviate boredom. Alexander Rupert, director of Sequoia Financial Group in Akron, Ohio, emphasizes, “There is a sense of fulfillment in work. It keeps us busy and also provides us with a sense of purpose.”

Retirees do not have to revert to their previous careers. There are senior-friendly roles that can align with their passions. Others are exploring opportunities in the gig economy for added flexibility and income.

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Considering a Change: The Possibility of Moving In With Family

While parents generally don’t anticipate needing financial aid from their children, unplanned circumstances may lead them to seek support. Insufficient retirement planning can result in some retirees moving back in with their adult children.

Planning Ahead: Prioritizing Retirement Savings

Avoiding reliance on adult children requires focusing on saving for retirement. A survey conducted in 2022 by Savings.com revealed that half of parents with children over 18 continue to provide financial support, averaging $1,000 monthly, or $12,000 each year. That’s significant money which could otherwise enhance retirement savings.

Struggling with Guilt: Spending Your Hard-Earned Savings

After years of saving diligently, new retirees may feel conflicting emotions about spending their nest egg. While eager to enjoy their retirement, they might find it difficult to spend money due to a deeply ingrained frugal mindset.

Byrke Sestok explains, “People who have done an excellent job of saving for retirement often find it challenging to spend their money because it does not feel natural.”

Financial Management: Establishing a Realistic Budget

To combat feelings of guilt when spending retirement savings, Sestok suggests creating a budget that reflects one’s assets and income sources. Establishing monthly spending goals can help retirees enjoy their finances without fear.

This issue seems ironic, especially considering that many Americans are unprepared for retirement. Yet, those who experience anxiety over spending can risk missing out on essential life experiences and enjoyment unless they make a conscious effort to use their savings wisely.

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Are You Prepared for Mandatory Retirement Withdrawals?

If you have invested in a retirement account like a 401(k), IRA, or SEP-IRA, the law requires you to start taking minimum withdrawals when you turn 70 ½. This rule obligates retirees to withdraw a specific amount, regardless of their financial needs.

Many individuals express concerns about this requirement. “I have many clients who will say, ‘I don’t need to take this much out,’” stated Geary, a financial advisor. Ignoring this mandate could result in a hefty tax penalty of 50 percent on the amount that should have been withdrawn.

Explore Diverse Saving Options

To avoid being forced into unnecessary withdrawals, diversifying your savings across different types of accounts is essential. Geary recommends considering options such as a Roth IRA, which does not require minimum distributions during the account holder’s lifetime. If you own a Roth 401(k), transferring it to a Roth IRA upon retirement is an option to consider.

Weighing the Pros and Cons of Relocation

For many retirees, selling their homes and moving to more affordable locations appears to be a wise decision. “A lot of retirees immediately decide to move away and start over,” shared Leon C. LaBrecque, a seasoned attorney and financial planner. However, he warns that such moves may not always lead to positive outcomes.

LaBrecque recounted the experience of a retired client who relocated five times over a decade in search of the perfect home. This pattern, he noted, resulted in significant wasted resources and effort.

Test New Areas Before Making a Move

LaBrecque advises potential movers to try renting in a new location for a few months before committing to buy. This approach allows you to gauge whether the new area and lifestyle truly fit your needs without the hassle of a permanent move.

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Friendship and Financial Disparities

Retirement presents more opportunities to connect with friends, but this increased socializing can sometimes create financial tension. Kristi Sullivan, a financial planner, explains, “You may have had a similar career as your best buddy, but if he or she saved better than you, your retirement lifestyles may not match up.”

Budgeting for Social Activities

To maintain a healthy social life without financial strain, Sullivan suggests taking the lead in planning activities. “Be the one who suggests activities first and keep them within your budget,” she advises. If an outing exceeds your financial capability, it’s perfectly acceptable to decline the invitation. “If you can’t afford the round-the-world cruise, don’t go,” she adds.

Ashleigh Ray contributed to the reporting for this article.

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This article originally appeared on GOBankingRates.com: The Downsides of Retirement That Nobody Talks About

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