Avoid Going Broke in Retirement

Nobody plans to run out of money during retirement. Over the decades of our working lives, we tend to either actively plan (and save) for retirement, or hope that we’ll end up with enough put by to live out our after-working years with dignity. Yet, lots of things can happen over a three-decade retirement period that drain our savings and put goals at risk. You can take steps to address this risk head-on and avoid “going broke” in retirement.

What Going Broke Looks Like in Retirement—Gary’s Story

Although there are horror stories of destitution, for many retirees who run out of money the reality is a life constrained—down-sizing of homes, reliance on family or children, no money for extras or fun. I recently polled my network and heard just such a story that I think is helpful to put this risk in context.

Gary (not his real name) retired at 67 after a life of working, mostly as a long-distance truck driver. Although he was divorced, he’d managed to save a small amount for retirement, about $40,000, mostly through profit-sharing plans at work. His Social Security payment was decent, about $2,000/month, and though it wasn’t enough to live on, he could count on it. Gary’s health wasn’t great, primarily due to years of cigarette smoking, and he didn’t have an option to go back to work once he’d retired—the work was too physical for him as he aged.

Gary planned for a modest lifestyle. He had purchased a trailer before retiring which had low utilities and maintenance, he owned a decent car, and he didn’t have expensive hobbies or travel plans. Gary wasn’t hurting for money as he entered retirement and didn’t have high expectations for what retirement would hold, other than being able to quit working and spend time how he wanted.

Despite planning for a simple retirement, his health risk caught up with him and torpedoed his financial plan. After a series of problems with his kidneys, medical costs and the need for long-term care (just for recovery initially, not for a permanent care solution) quickly sapped the amounts he’d saved in cash. As health issues persisted, and the need for long-term care in his early 70’s became a reality, Gary “went broke”. He had to sell the trailer and fall back on county Medicaid coverage, which limited the amount he could spend from his Social Security check and claimed all the other assets he had put aside.

Gary’s story is not uncommon—a shock to modest resources set the wheels in motion to financial hardship, and though he didn’t end up on the street, all dreams for a comfortable retirement are done for Gary.

Steps You Can Take to Avoid Going Broke

I wanted to share Gary’s story not to scare you into planning for retirement, and definitely not as a way to “sell” you an easy solution for your retirement. Gary’s tale is more complicated than I gave it space for, and avoiding a similar fate requires addressing several factors in the lead-up to retirement. If you don’t feel prepared for retirement, there are steps you can take now to avoid going broke, but some of them won’t be as easy a lift.

Easier Factors You Can Adjust Early Before Retirement

• Having more than one source of resources for income: For almost all retirees, Social Security is the bedrock on which the whole retirement income plan is built. Social Security is a complicated topic and know that it should be an integral part of your retirement. But, it’s not generally enough. You will need more savings, either in a company 401(k) plan or IRA. How you turn those savings into income is a topic for another post, but expect that you’ll need stocks, bonds, and cash saved up in order to supplement Social Security (and for a minority of workers, an employer pension).
• Diversifying your assets: Do not put all your assets in cash, or stocks, or bonds. You need a mix. Cash and bonds don’t provide the kind of growth most people need to ward off the effect of inflation over a long retirement. Stocks are riskier than bonds. Although there’s a lot of debate about an appropriate mix for retirees, you would do well to have around 60% of your investable assets in stocks and 40% in bonds. Maybe go 50/50.
• Cutting back on spending: I was floored by the research that almost half of retirees spent more in the first two years of retirement than they did before retirement. I like to call these the “go-go” years, and if you haven’t saved up enough to afford them, you will need to watch your budget. Many retirees will instinctively cut back once they see they can’t afford their retirement, but the key is to make a plan for your budget before you retire!
• Planning for a sufficient amount of time—at least age 85: People who retire at 65 have at least 20 years on average in retirement. No one knows the future for your life, but it’s unwise to not plan for age 85 at a minimum.
• Settle Your Home Expenses: Gary had the right idea in downsizing to a cheaper home. If you have not already paid off your mortgage, it’s important to do that before you retire if you expect that you won’t have ample resources. As a bonus, your home can be an important emergency asset to tap later in life if your other resources are exhausted.

Harder Factors to Predict or Adjust

• A backup plan for work: A startling statistic—although half of people plan to do some work in retirement, only 15 percent of retirees cite work as a primary source of income. Some people, like Gary, can’t rely on work as an ongoing income option because it’s too physically taxing or they can’t find work. If work is an option for you, it’s important to nurture this choice early on in your planning. Keep your skills sharp and talk with your current employer about continuing in a part-time or contract capacity. Don’t expect paid work to be available in retirement if the rest of your resources are exhausted.
• Health care needs and Medicare options: Your health and insurance usage are difficult to predict, unless you’re currently dealing with a chronic condition. Each year, you have options to change your Medicare coverage (which begins at age 65) and possibly supplement coverage. The major components of the cost, like the monthly premium and out-of-pocket expense, are somewhat predictable. Health costs typically increase faster than inflation, so this large chunk of your retirement budget is known, but the actual amount you’ll need to budget is highly dependent on your situation and health.
• Long-term care: Much like medical care, long-term care (whether in a skilled nursing facility or at home) can be difficult to predict. Many seniors take advantage of some form of long-term care before the end of their lives, but the level and duration make all the difference in how much you’ll need to budget. A high-end assisted living facility in Iowa costs $6,000 or more per month. The impact to your budget is completely dependent on how long you need care—staying for a few months is obviously quite a bit cheaper than spending 3 years in a nursing facility. Also, the insurance options for this big expense are rather limited (for cost effectiveness) once you hit retirement age. Gary found out just how much of a budget-buster this expense can be for retirees with modest savings.

No Silver Bullet for Going Broke

Going broke in retirement is a frightening possibility, as a retiree has fewer options to adjust the further one gets into retirement. But, there are multiple levers you can pull to make adjustments in the run up to retirement, even for people of modest means. There is no one sure-fire way to guard against the risk of a poor retirement unless you have tremendous wealth. Instead, take a multi-faceted approach to doing the easy and hard things it will take to plan, and you stand a good chance of avoiding the fate of people like Gary.

 

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