We all hope to avoid going broke in retirement. No one wants to be penniless when they retire. It might probably be too late to start saving strategies when you see retirement signs in your life. You need to look into smart strategies much earlier on in your life, in order to avoid living on the edge after retirement.
According to latest data, 50% of Americans don’t possess any retirement savings, totally relying on and living on Social Security.
You’ve probably put in tons of hard work throughout your life, saving money for that nest egg during retirement. Yet, you are wondering whether you’re doing enough.
There’s always an element of uncertainty about the future. There are emergencies to account for and inflation is another demon to look out for. Here are the top 6 tips to avoid going broke in retirement when it’s time to receive those retirement gifts from your colleagues.
How to Avoid Going Broke in Retirement
#1. Shifting the Bias – How to Retire Early with No Money
We all seem to be entrenched in a bias towards the present. You probably get tempted to blow the paycheck as soon as it arrives. There are so many pressing demands, not to speak of exciting avenues for spending.
All this does offer us immense temporary gratification, but it could only lead to becoming retired and broke and even to die broke.
We need to shift the bias from the present to the future. That’s the only way you’re going to increase the size of that nest egg.
#2. Automatic Savings
When considering the question of how much do I need to retire, it is better to opt in for automatic savings to avoid going broke during retirement.
- Today, there are many apps that offer tools for automatic savings. They automatically transfer specified amounts from your earnings into a savings account. For instance, Acorns is an app that rounds up the amount whenever you make a purchase. The amount rounded off is transferred to your savings account.
- More companies are now offering automatic enrollment options. Employers will directly divert a specified percentage of your paycheck to the investment option that you have selected. You can use the 401(k) plans for automatic enrollment to increase savings. It is also flexible, so you could change the contribution amounts; choose a different investment option and even opt out of it, in case of an emergency in retirement.
#3. Smart Withdrawal Strategies
Even if you have managed to save a good amount for retirement, you could still be in troubled waters if you don’t prioritize your withdrawals. You might start wondering what to do in retirement, if you don’t have sufficient savings.
- Will I have enough to retire? Follow the withdrawal hierarchy and you could end up saving big bucks. Check out which one of your bonds or certificates are near maturity stage. These will not bear any more interest, so this is what you need to draw on first.
- Withdraw from accounts that are taxable first, so that you don’t end up penniless in retirement.
- Try taking out some of the retirement money in the form of stocks or bonds (instead of withdrawing in cash all the time) so that you continue to have some assets) in order to avoid retiring poor.
#4. Multiple Sources of Income
Do I have enough money to retire? While considering this, it makes sense not to put all your eggs in one basket unless you want to end up retiring broke. When you retire, you should be able to access from multiple sources, instead of a single one. If you’re wondering ‘should I go bankrupt’, you can be reassured that even if one stream dries up, there are several others.
For instance, if you’re relying only on Social Security in retirement (which is the main source of income for more than 61% of retired people) the issue is that social security can pay for only 77% of benefits by the year 2035, as compared to today.
There are so many such cases of retirees who are 60 years old and no retirement savings. On the other hand, if you have a diversified portfolio, such as Social security, pensions and IRAs and so on, your funding will be more stable.
If you have invested in shares, it makes sense to invest in different sectors as well, namely technological sectors; health sectors; utilities, as they all respond differently to market situations. Don’t be broke during retirement, by following such strategies to avoid bankruptcy in old age.
#5. Health Insurance
In spite of Medicare, there are some extra payments that you have to make in retirement. Moreover, the costs are surely going to skyrocket by the time you reach your retirement age, and it could wipe out the major portion of your savings, as we have heard from many retirement stories.
According to a Fidelity report, a retired couple would probably have to spend around $260,000 out of pocket in 2016, as compared to $220,000 in 2014.
Factor in at least one major illness/injury during your retirement age, or you might just end up being 70 and broke. For instance, a hip surgery could easily cost you around $20,000. Enroll in an HAS with at least around $1300 deductible plan.
#6. Bankrolling Your Kids
It’s great to want to bankroll your kids. But before you step out and do it, save yourself first to avoid bankruptcy during retirement. Financing your kids at the expense of your retirement nest egg is going to cause you a lot of headaches and no financial security. It could boomerang on your kids, as you will only be a burden on them. After all, they will have student loans available to pay their tuition and living expenses if need be.
Take care of your savings before putting it all out for the kids to avoid bankruptcy during retirement. For instance, you can opt for smart strategies like Prepaid tuition. You essentially buy tuition for you children at current rates and lock it up for the future. You can use these in state and private schools and colleges all over the country at a future date, even if the price of tuition rises at the time.
Americans are typically living a longer life and many seniors are running out of their retirement funds. This is mostly due to mismanagement of wealth and an unsustainable lifestyle during youth, as also due to rising medical costs. People from differing economic backgrounds have been going broke in retirement, even those who had really successful careers.
If you’re saying to yourself ‘I want to retire now’ be sure that you have followed the right strategies of money management and put your eggs in the right baskets. Adjust your budget and spending, reduce expenses aggressively so that you can avoid ending up bankrupt in retirement.