Retirees Are Running Out of Cash Faster Than Expected, Even With Social Security
Despite abundant financial advice about planning for retirement, it can be hard to envision what the transition from earning a paycheck to living on fixed income will actually look like. Even with Social Security coming in each month, some retirees find their savings shrinking faster than expected. Financial and retirement advisors explain why this happens and how to avoid it.
Social Security Alone Isn’t Enough
Aviva Pinto, financial advisor and managing director of Wealthspire, made clear that, in most cases, “Social Security alone will not sustain a person in retirement. They need to have savings and have savings in retirement plans -- 401(k), 403b, IRAs.”
Social Security is only designed to cover about one-third to one-half of most retirees’ fixed monthly expenses, added Joel Steele, co-founder, owner and financial advisor at Steele Financial Solutions.
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A Planning Gap
A lack of structured financial planning is one of the most common reasons retirees run out of money.
“More than half of adults don't budget their money and for those who do, only about 25% stick with it," said Barry Cothran, a financial advisor at Vision and Hope Financial LLC. "Surveys show that 67% to 80% of adults have no written financial plan.”
The combination of not budgeting, lack of planning and cashing out retirement savings creates retirements that hang “by a loose thread on a ragged piece of cloth,” he said. “One tug, one pull and the fabric falls apart.”
A financial plan should factor in inflation, longevity, market movements, healthcare and long-term care costs, Pinto said. “A plan will show you if you have actually saved enough to retire.”
Underestimating Expenses
Many retirees miscalculate what they’ll actually spend on everyday essentials and discretionary categories.
Steele pointed out that many people fail to calculate food and entertainment expenses, for example, as well as other expenses beyond the fixed.
“You have to be realistic,” he said. He suggested looking at your spending over the past six months and using the average as a baseline, rather than logging every dime you spend to get a sense of what you need each month.
Inflation and Longevity Erode Retirement Savings
Even modest inflation can significantly increase expenses over a long retirement.
“If your budget is $100,000 a year today, in 20 years it will be $163,862 if inflation is running 2.5%,” Pinto said.
People are also living longer due to medical advances. “If you retire at 65, you will have another 25 years (plus) in retirement,” she said.
Steele recommended not taking the maximum withdrawal from your retirement assets if you don’t need it. “Let some of your money grow and reinvest to counteract whatever the inflation impact will be.”
Withdrawal Strategies and Early Decisions
How and when retirees withdraw from their savings has a major impact on how long their money lasts. Leaving money invested for longer is ideal.
Steele also cautioned against tapping Social Security too early. “It's great to have extra money, but if you don't need Social Security early, don't take it. It's more valuable to have more money when you need it more once you fully retire.”
Healthcare and Long-Term Care Risks
Planning ahead is essential, but healthcare costs can quickly derail even solid plans.
“Healthcare and long-term care costs are increasing at a rate higher than inflation,” Pinto said. “If you do not have a long-term care policy, you must make sure you have saved enough for your care when you are older.”
The more secure your options, the less likely you are to get blindsided by medical costs.
Retirement Success Comes Down to Planning
The experts agree that running out of money isn’t usually a combination of overlooked risks and lack of preparation.
“Without a plan, they’re relying on hope,” Cothran said. “Although hope is a good thing, it's not a strategy for success.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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