Making your retirement money last is imperative to enjoying financial security in your later years. Unfortunately, far too many retirees make major mistakes that could leave them at risk of running short of cash. Here are four big errors that could leave you broke.
1. Withdrawing too much too fast from your retirement accounts
To make sure your retirement money doesn't run short, you can't afford to drain your account too quickly. Taking too much money out impairs the ability of your money to work for you. When you have too little invested to earn reasonable returns, your accounts will empty out fast.
To make sure this doesn't happen, decide on a safe withdrawal strategy that makes sense for you. Experts recommended the 4% rule for years, but with interest rates so low now and life spans getting longer, this approach leaves you at serious risk of running short.
The Center for Retirement Research at Boston College instead recommends calculating your withdrawal rate based on tables the IRS prepares to help you figure out required minimum distributions. If you want to simplify things, though, you could always just decide on a lower withdrawal rate, such as taking 3% of your account balance out in the first year of retirement and then adjusting withdrawals to keep pace with inflation each year thereafter.
2. Investing too conservatively (or not conservatively enough)
As a retiree, you need to maintain the appropriate asset allocation. If you invest too conservatively because you're scared of incurring losses, you could earn very low returns, causing your nest egg to dwindle too fast. On the other hand, if you're overexposed to potentially volatile stocks, you could experience outsize losses.
To make sure you have the right mix of investments, subtract your age from 110. Invest that percentage of your portfolio in the stock market (so the portfolio of a 70-year-old, for example, would have 40% in stocks) and the remainder in safer investments, even though they have a lower potential return on investment.
3. Not watching your investment fees
Investment fees eat away at returns throughout your working life, but they can become an especially big problem when you're on a fixed income and every dollar counts.
Today, most brokerages offer $0 commissions on stock trades, so you shouldn't pay a fee to buy or sell investments. And carefully review management fees for any funds you invest in. If you work with a financial or investment adviser, you'll also want to understand the adviser's fee structure upfront and make sure it's reasonable and worth the money.
4. Not planning for healthcare and long-term care
Health care is one of the biggest expenses retirees face, with the Employee Benefit Research Institute estimating a senior couple in 2020 might need as much as $325,000 to cover out-of-pocket health care costs throughout retirement. And that doesn't even take long-term care into account.
You should cover health care throughout the entirety of your career by saving money in a health savings account (HSA) or earmarking some 401(k) or IRA funds for your medical needs. If you haven't done that, try to save an emergency fund for medical care, shop around for the most comprehensive insurance coverage you can find, and consider long-term care insurance.
Now you know how to avoid these mistakes that could drive you broke, so hopefully, you can enjoy a financially secure retirement.