Ways People Become Poor in Their Later Years

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 working 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.

Let’s look at some of the ways people run out of money in retirement – so that you can avoid them.

No Margin of Safety

One of the biggest contributors to people becoming poor in their later years is not having a financial buffer for the unexpected.

The unexpected can include severe market disruptions and recessions, large housing repair expenses, a serious health event, the death of a spouse, or adult children who become financially dependent.

It’s important to be proactive in protecting against a worst-case scenario. An experienced financial professional can help you understand what types of investment risk and insurance options may make sense for your situation.

Pension Elections That Undermine Stability

Your later years, particularly retirement, are the time to take money from your pension. However, 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 retiree's life expectancy. If a couple chooses to take the highest payout option and the spouse who has earned the pension dies prematurely, a major source of their household cash flow disappears.

Tying Up Too Much Wealth in Your Home

Homes can be one way to accumulate additional wealth, but homes also fall into the category of being a non-working asset. 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

The most common issue contributing to later-in-life poverty is a lack of comprehensive financial planning early on.

Many people 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, and should be revisited every so often.

Underestimating Inflation

Another major factor contributing to poverty is underestimating the impact of inflation. 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, it will be worth much less in 25 years. Modeling different inflation scenarios makes clear how devastating it can be.

Overly Optimistic Investment Projections

Many people are also overly optimistic in projecting investment returns. Assuming your investments will earn 10%-12% growth every year is asking for trouble.

In general, unrealistic return assumptions skew projections. No one wants to reach retirement only to discover that the income they were counting on was based on investment returns that never materialized. What will you do then?

Many other factors, such as longevity risk and healthcare costs, can trip up retirement planning. That’s why it’s crucial to focus on comprehensive long-term planning that can orchestrate all aspects of your financial life to work together.

An experienced fiduciary will factor in your goals, retirement timeline, various risks, and different types of product options to help you create the best plan tailored to your needs. It takes diligence and help from a knowledgeable advisor to make accurate projections over decades. There are no shortcuts when planning for 30+ years of retirement, but the reward for thorough planning is truly priceless!

To learn more about the difference a fiduciary can make for your financial success and retirement planning, visit www.elisabethdawson.com.