3 Reasons Retirees Go Broke

Have you ever wondered what actually causes people to run out of money in retirement?

Everyone planning for retirement does. But the thing is, most retirees stress about the wrong things. And if you’re focusing on the things that don’t matter, you’re putting your retirement at risk.

Over the years, I’ve seen 3 critical mistakes that clients have made that put their retirement in jeopardy.

In this video, you’ll learn what these three mistakes are, and how YOU can avoid them.

But to start, let me show you the number one reason that retirees run out of money and why it might be harder to avoid than you think.

Overspending

So, Bill and Jane have just retired at age 62. They have around $1 million invested and they’ve just started receiving their Social Security benefits, which total around $5,000 per month.

Given that their after-tax living expenses are around $9,000 per month, including housing and healthcare, they start out with an 4.4% withdrawal rate.

That puts their Monte Carlo odds of not having to adjust their lifestyle at 90%. That’s a pretty good-looking financial plan.

But, because they’ve work so hard over the years to get here, they decide to front-load their first few years of retirement with as much travel as possible. You all know how much I love travel, so I’m all for it.

So, they decide to budget for $20,000 per year in the first couple of years of retirement to go see the world.

Great! So, with this travel added in, their Monte Carlo odds drop to 86% and their withdrawal rate increases to 6.2%. That initial withdrawal rate is a little high, but we know that it’s going to drop back down after the first couple of years.

So, this is still a good-looking plan. Again, I like to see my clients somewhere between 70% and 90% with these Monte Carlo numbers.

But – Bill and Jane start taking it a little too far.

First, it’s Japan. Then Tuscany. Next, Fiji. Finally, they go on that dream African safari.

The next thing they know, their travel budget has ballooned to $100,000 in their first year of retirement.

Whoops.

Their year-one withdrawal rate now comes in at 13.9%! And their Monte Carlo odds have now dropped to 79%. The plan is still good, so we’re okay.

But Bill and Jane have been bitten by the travel bug. And they figure, they only have a few more destinations on the bucket list. And since the plan still looks good, why not check off some of these dream destinations before they start slowing down.

So, in year two, they visit Iceland, spend a week in the Algarve, go on a cruise to Antarctica, and visit Thailand.

They end up spending another $100,000 on travel in year 2.

Uh oh.

Now their Monte Carlo odds come in at 65%.

So, in just two years, their financial plan goes from robust to something we need to monitor. If they stay hooked on travel for just one more year, they could find themselves at a place where just their base-level living expenses could be touch-and-go.

Fortunately, I haven’t seen this much in real life, but I HAVE seen it. And it’s not pretty. To wake up one day in your mid-60s and realize that you only have 3 or 4 more years of runway in your portfolio is a nightmare.

And there’s no good way to fix that without extreme measures.

So, how do you avoid this?

This example with Bill and Jane is a perfect illustration of two takeaways that can help you prevent this kind of overspending in those early years of retirement.

First is to focus on your withdrawal rates. It’s easy to try and pack in all those trips into year one, but sticking to a reasonable travel budget would have been a better idea for them to methodically check all the boxes on their bucket list over time.

They could have prioritized the trips that would be more difficult as they got older, such as the African safari, and punted on something lest physically intense to later years, such as the trip to the Algarve.

That way, one down year in the markets doesn’t put them behind the eight-ball.

The second way they could have avoided this could have been to start taking some of these trips before retirement and push retirement back a year or two.

I know that when you’re DONE with work, you’re DONE. But delaying retirement one or two years often does make a material difference in a financial plan. Especially if someone is around age 65 when Medicare kicks in and you don’t have to worry about private health insurance anymore.

And now that you know the number one mistake that can cause retirees to run out of money, let me show you another mistake that I’ve seen. And it’s a heartbreaker.

Bailing Out the Kids

Nancy is widow in her mid-70s with two adult sons. Nancy’s husband, Owen, passed away about 10 years ago after an incredibly successful career. Starting out, Nancy and Owen never imagined that they would have the kind of money they saved.

Unfortunately, the boys haven’t made much of an effort to strike out on their own, even after all these years. They don’t have any kind of consistent jobs – and they don’t seem to be motivated to find one.

But Nancy lets the boys live at her lake house and pays all of their bills – even going so far as letting their girlfriends live there with them too.

While Nancy has plenty of savings to provide for herself, the costs of providing for both of her boys pushes her withdrawal rate to an unsustainable level.

But Nancy doesn’t want to kick the boys out on the street, either. Owen was the disciplinarian and that’s not a role she enjoyed. And it’s not like they’re bad kids – they’re just not motivated.

She’s in a tough spot: either she cuts the boys off (and risks alienating them) or she continues down a path that leads to her running out of money.

So, how do you avoid this “failure to launch” trap? It’s a tough one. You love your kids, and you want to give them everything you can, but sometimes the best gifts come wrapped in sandpaper.

Nancy sat down with the boys and laid out her financial situation. She made it clear that, if they continued down this path, there would be nothing left for any of them.

She told them that she was selling the lake house in two years. They had until then to be in a place where they could sustain their own lifestyles.

While this might have been the hardest conversation she’d ever had, in the end, she did them an incredible kindness.

Fortunately, the “failure to launch” trap is something that can be fixed with boundaries and a few hard conversations. But without action, it can absolutely take down a financial plan.

And there’s one more common reason that retirees run out of money. And it’s a really easy one to make.

Investment Decisions

Early 2009 was not a fun time to be a financial planner. For me, it really did feel like the world was ending. But, even with all the chaos going on, the market movements were still well within what statistical modelling said they should be.

And in March of that year, one of my clients came in for his annual review. This gentleman was a widower in his late 70s and lived well within his means. He was very alarmed by what was happening (as we all were) and wanted to go to cash.

We went over the numbers with him. Even though he was down, his portfolio still had more than enough to sustain him for the rest of his life.

Not to mention, his portfolio only had around 30% to 40% allocated to stocks. So, even though stocks were way down, his portfolio wasn’t down nearly as much as the stock market in general.

After going over all the numbers, we decided to stick with his strategy. Sure, the news was scary – and things really were touch-and-go with the economy there for a while. But even if the market continued to drop, he would still be okay.

As it turns out, this meeting was on March 9th – the day the market bottomed.

Had he gone to cash, he would have locked in those market declines. And who knows how long it would have taken him to get back in?

A year later, his portfolio was up over $300,000 and he was so grateful that he even got a little emotional.

Everyone makes investment mistakes – even Warren Buffet has made investment mistakes. But how can you avoid the kind of big mistakes that put our entire financial plan at risk – mistakes like going to all cash when the market is down?

Well, that’s just it. The kind of mistakes that can take you out tend to be the big ones, whether it’s going to cash or going all-in on a private equity deal.

If you want to take a shot on a particular company with 5% of your portfolio, I’m certainly not opposed to that. But large bets on highly risky moves can and do go south – and starting over from zero is not much fun.

The same goes with being overly conservative. In the moment, market downturns feel really scary. The news will do their best to engage with your emotional thinking to keep you attention (and to pay their advertisers).

But things are never as bad as they seem and they’re never as good as they seem. Whether it’s another all-time high or a bear market, have a strategy and STICK TO IT.

Now that you know some of the top reasons retirees run out of money, you’ve got to stop stressing over things that seem like they’re critical but rarely cause a financial plan to fail.

So, check out this video, where I go over the top 3 things that retirees stress over that I’ve NEVER seen ruin a financial plan. See you there.

If you’re relying on one of these in your retirement and would like a second opinion, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
SHARE THIS POST
ipad free ebook: How to Retire Checklist
Retirement help delivered to your inbox
Subscribe to our monthly newsletter and get your copy of our free ebook: The ‘How to Retire’ Checklist
SIGN ME UP!