Retirement is supposed to be a time to enjoy the fruits of your labor, but research reveals that nearly half of retirees may outlive their savings. According to a Morningstar study, about 45% of Americans who retire at age 65 could run out of money before the end of their lives. Here are four financial pitfalls to avoid, along with strategies to help safeguard your savings.
1. Underestimating Taxes in Retirement
Many retirees assume they’ll fall into a lower tax bracket after they stop working, but this isn’t always the case. Spending often increases in early retirement, as people have more time for travel, entertainment, and other hobbies. With increased spending and possible withdrawals from tax-deferred accounts like 401(k)s, retirees may end up in the same—or even a higher—tax bracket.
2. Withdrawing Money Inefficiently
When tapping into your savings, improper withdrawals can lead to higher taxes and missed opportunities for growth. For example, withdrawing large sums from tax-deferred accounts for big purchases, like a home, can trigger steep tax penalties.
3. Ignoring Sequence-of-Returns Risk
Retirement savings are vulnerable to market volatility, especially in the early years of retirement. Sequence-of-returns risk refers to the danger of withdrawing funds during a market downturn, which can dramatically deplete your savings. For instance, if you retire when the market is down and need to withdraw from investments, you might struggle to recoup those losses.
Incorporate principal-protected investments, like fixed annuities. These can provide stability during market downturns, allowing you to avoid withdrawing from your portfolio until it recovers.
4. Avoiding Appropriate Investment Risk
Some retirees stay too conservative, keeping assets in low-yield options like cash or fixed-income investments. While these options feel secure, they may not keep up with inflation or provide enough growth for a long retirement. Conversely, others may chase high-risk investments, hoping for quick gains, only to face significant losses.
The solution – a balance by investing in diversified assets, mutual funds, annuities, CDs, etc. These options tend to offer returns over time while mitigating risks.
Avoiding these common financial pitfalls and proactively managing your savings can help you achieve a financially secure retirement. As the research shows, many retirees face the risk of outliving their savings. By making tax-efficient decisions, planning for market fluctuations, and taking a balanced approach to investment risk, you can make your retirement savings last.
Source: Business Insider
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