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Retirement is often romanticized as the time when hard working Americans finally get to slow down and enjoy a life of leisure, free of the worries and stressors of their earlier years.
And yet, this is not always the case, particularly if people have not planned properly for their retirement, have poor spending habits, or meet with unexpected expenses. It is, unfortunately, quite possible to find yourself in or near poverty in your later years.
GOBankingRates spoke to financial advisors, Joseph F. Myer, CFP(r), President of Courser Capital Management, LLC and Michael Ryan, a financial advisor and owner of the financial literacy website Michael Ryan Money, to discover the ways that people become poor in their later years, so you can avoid them.
No Margin of Safety
Myer said the biggest contributor to people becoming poor in their later years is not having a financial buffer for the unexpected.
“The unexpected is a broad term, so some of the things I’ve seen over my career include severe market disruptions and recessions, large housing repair expenses, or adult children who become financially dependent.”
Assuming Investment Professionals Can Predict the Future
Market participants often assume that highly educated and highly paid investment professionals can predict the future, Myer cautioned. “This flawed assumption can lead to over confidence about future market performance and create financial vulnerabilities.”
He shared that, based on research from Paul Hickey of Bespoke Investment Group and a 2020 New York Times article by Jeff Sommer, “Each December since 2000, the median forecast never called for a stock market decline over the course of the following year… and yet the stock market lost money in six of those years. Since these observations were made by Hickey and Sommer, the market chalked up yet another losing year in 2022.”
Pension Elections That Undermine Stability
Your later years, particularly retirement, are the time to take money from your pension. However, Myer warned, some pension elections can undermine a couple’s financial stability if one of them dies.
“The highest pension payout option is always when it’s based on a single retirees life expectancy,” he said. “If the husband or wife who has earned the pension dies prematurely, a major pillar for a couple’s cash flow goes away if they choose to take the highest payout option.”
Tying Up Wealth in Your Home
Homes can be an effective way to accumulate additional wealth, but homes also fall into the category of being a non-working asset. Myer explained, “This means that homes do not produce cash flow, they demand cash flow in the form of maintenance, taxes, insurance, improvements, etc.”
Thus, if a retiree has been too fixated on reaching retirement without having a mortgage and hasn’t saved enough in portfolio assets, “they will eventually discover their home detracts from their finances until they sell it… then they have to move somewhere else!”
Lack of Financial Planning
Michael Ryan said that the most common issue contributing to later in life poverty is a lack of comprehensive financial planning early on.
He said, “Many rely on quick estimates or simple projections without fully modeling out their needs over decades. They fail to account for how much savings is required to maintain their lifestyle over potentially 30+ years in retirement.”
True financial planning considers all assets and income sources over time, he explained, and that is also something that should be revisited every so often, as well.
Another major factor contributing to poverty is underestimating the impact of inflation, Ryan said. “Expenses don’t remain static-healthcare, housing, food, and other costs rise significantly over time. People often just look at the total savings they accumulate without understanding how inflation erodes purchasing power.”
While people who have saved close to $1 million may think it’s enough, he pointed out that it is worth much less in 25 years. “Modeling different inflation scenarios makes clear how devastating it can be.”
Overly Optimistic Investment Projections
Ryan also noted that a lot of people are also overly optimistic in projecting investment returns.
“Assuming annual 10%-12% growth is asking for trouble,” said Ryan. “Average returns are generally lower over time, often 6-8% depending on asset mix. And as one ages, investing usually becomes more conservative, lowering returns further.”
In general, Ryan said, unrealistic return assumptions skew projections. “There are many other factors like longevity risk and healthcare costs that trip up retirement planning. But the core issues are lack of comprehensive long-term planning, failing to account for inflation erosion, and overestimating investment returns.”
However, barring unexpected crises, health issues and the like, Ryan suggested that “with prudent planning and realistic assumptions, retirement security is achievable for most. But it takes diligence and help from knowledgeable advisors making projections over decades. There are no short-cuts when planning for 30 years of retirement.”
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