One of the biggest fears anyone has about retirement is the prospect of running out of money. Even with meticulous planning, it is possible to go broke in retirement if you do not stick to a clear budget and account for changes in your finances. Naturally, planning your finances carefully before retirement will reduce the chances that you run out of money, but it is important to check in regularly to ensure you are still on the right track and make adjustments if necessary.
Also, some red flags might arise while you are retired that could put you at risk of going bankrupt. Learning to recognize these signs will put you in a good position to reevaluate your position and shift your spending. Some of the red flags to look out for include:
1. Underestimating taxes
Often, people underestimate the impact that taxes will have in their retirement. You will need to plan for taxes in your retirement budget. If you find that you are spending more than you expected or you did not plan for taxes, you will need to reconfigure your budget and perhaps figure out a way to reduce expenses elsewhere. However, you may be able to save money by reconfiguring your retirement accounts. Creating a post-tax account like a Roth IRA, for example, will let you take out additional money in a year without pushing you into a higher tax bracket. Converting all or a large portion of your tax deferred retirement account assets to ROTH IRA status will create opportunities for significant tax free income throughout your retirement, and insulate all of those converted dollars from all future tax increases that may come in the future. Given the country’s terrible financial condition, and rapidly aging population, higher taxes in the future may be very likely. You will need to pay taxes on any retirement account that you convert to a Roth form, so you will also need to plan for that.
2. Getting divorced
While no one plans to go through a divorce during retirement, it does happen. Unfortunately, the divorce process itself can cost a lot of money, which eats into savings significantly. Then, at the end of the day, each party is left with much less money to live on as a result. If you have a prenuptial agreement, the divorce process may not be as devastating. However, it is important to think realistically about the new budget for both parties and how feasible it is for each individual to live on that amount. If at all possible, it can be wiser to spend money on counseling and attempt to salvage the relationship rather than going through a divorce.
3. Taking on new debt
In an ideal world, you will have paid off all debts before retiring. If you still have low-interest debt like a mortgage, it’s not too much of a concern. However, taking on new debt for unexpected expenses can be disastrous, especially if it carries a high-interest rate. Before taking on any new debt, you should have a plan for paying it down as soon as possible. In all likelihood, you will need to figure out how to reduce spending in other ways to account for the new monthly payment. You should also consider a short-term side hustle to pay down the debt as quickly as possible and keep yourself on the right track.
4. Ignoring market fluctuations
When you retire, you will need a defined strategy for withdrawing from your retirement accounts. However, you will likely need to change your strategy occasionally depending on the performance of the market. If you are not thinking about the markets as you withdraw money, you could end up spending your nest egg faster than you expect. When the market drops, you might want to consider reducing your spending and withdrawals or favoring certain accounts over others depending on their composition. Withdrawing funds for living expenses in negative market environments can make it very difficult to ever recover to your initial capital levels. An income for life annuity with low or no annual costs, and guaranteed principal and guaranteed income steam can help you avoid the risks of withdrawals in a negative market environment. Look at return rates each year to assess whether you need to alter your withdrawal rate. You can also talk to a financial advisor each year about your strategy to keep it on track.
5. Spending a lot on health care
Health care is one of the biggest expenses in retirement, and it can be shocking to find out how much you will need to have saved to live comfortably while paying for health care, particularly since there is the misconception that Medicare will cover all expenses. In fact, even Medicare Supplemental policies also do not cover any traditional long term care costs. If you find yourself spending a lot of money on health care, and especially if it is more than you expected, you may need to reconfigure your budget. A couple planning to retire now would need nearly $300,000 to cover their expenses—and this does not include long-term care, which is the most expensive form of health care. Take your time when it comes to securing a Medicare Supp policy. Often, it is worthwhile to pay higher premiums for an account that covers more services, especially if you have not budgeted enough money for health care.
6. Lending money
Once retired, you will need to stick to a strict budget to keep yourself financially stable. When other people—especially children—ask for money, it can be difficult to say no. Unless you have specifically budgeted for this, you will need to be very judicious when lending money. The problem with lending is that your budget largely depends on making those assets generate money. You may need to ask for interest payments on any money you lend to ensure that you do not fall behind in terms of earning potential. If you know that you will likely end up lending money during retirement, be sure to account for this in your budget to avoid issues down the line.