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5 reasons why people outlive their money in retirement

Alex LaRosa, CFP®

Alex LaRosa, CFP®

Investment Advisor Representative

June 21, 2019

Every year since 1996 TransAmerica runs it annual Retirement Survey. This report canvases thousands of every day working Americans concerning retirement preparedness. While reading through the 2017 survey I was not surprised to find that the number one fear among Americans concerning retirement was outliving their money.  Running out of money in retirement should be a terrifying thought, but how does this happen?

  • They spend too much

This one seems obvious, but it is probably the number one reason people outlive their money. Spending past your means will drastically increases your chances of running out of assets. Your goal should be to maintain your lifestyle in retirement which will require you take a hard look in the mirror and be honest about your spending habits. Going into retirement with the idea that you will suddenly change your ways might prove more difficult now that you have nothing but time on your hands.

  • They save too little

The average retirement savings for Americans between the ages of 55-64 is $374,000. Is that enough? Well, according to Fidelity the average 65-year-old retiring today will need $280,000 for health-related expenses during retirement. Which leaves you with $94,000 for everything else. So, what is the magic number that you need to save? It all depends on how much you need a year, but the goal is to maintain your lifestyle.

  • They don’t plan for a long retirement

Increasing life expectancy has been reshaping the entire retirement planning industry. Many of the “rules” and “recommendations” are becoming outdated with people living longer than ever before. The reality is that people retiring today are in fact long-term investors with possible time horizons of 30+ years and should be investing as such.

  • They stay too Conservative

Rebalancing your portfolio to be more conservative in retirement is something that has been engrained in us all. One of the oldest rules out there is to subtract your age from 110 to get your overall allocation to equities and bonds. So, according to the rule a 60-year old’s portfolio should be in 50% equites and 50% bonds. This is one of those “outdated” rules because as we discussed in number three a 60-year-old could easily live into their 90’s. This makes new retirees’ long-term investors who cannot afford to be too conservative. Also, the current rate environment would argue that bonds are not the answer to the conservative part of your allocation and they really haven’t been for a while. There are better options than bonds if you are looking for some protection against volatility and market downturns. If you become too conservative with your investments in retirement you could be at more risk of outliving your assets.

  • They don’t plan for Inflation

There is a sinister force at work that continually poses a threat to retirement accounts everywhere. I am talking about inflation, or the loss of purchasing power due to rising prices. It is important to take the right steps to help mitigate the effects of inflation on your nest egg. Unfortunately, investments like bonds, CDs, annuities, and savings/money market accounts are all at risk of losing purchasing power. Equities are one of the only investments that will avoid inflation over the long term due to corporation’s ability to pass down the rise in prices to the consumer. An overly conservative portfolio will lose a great deal of purchasing power over the course of a retirement and may not be worth what you think.

Running out of money in retirement happens and it can be brutal. That is why it is critical to plan for your retirement well before the day it begins. Your retirement plan should be reviewed frequently and must always be accompanied by a solid investment plan. If you are concerned about retirement, reach out to us and we can help you plan for it.

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5 reasons why people outlive their money in retirement

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