About 45% of Americans will run out of money in retirement, including those who invested and diversified. Here are the 4 biggest mistakes being made.
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Nearly half of Americans retiring at 65 risk running out of money, Morningstar finds.
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Single women face a 55% chance of depleting funds, higher than single men and couples.
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Experts advise better tax planning and diversified investments to mitigate retirement risks.
If you're aiming to retire at the standard age of 65, buckle up because you're going to want to hear this one.
According to a simulated model that factors in things like changes in health, nursing home costs, and demographics, about 45% of Americans who leave the workforce at 65 are likely to run out of money during retirement.
The model, run by Morningstar's Center for Retirement and Policy Studies, showed that the risk is higher for single women, who had a 55% chance of running out of money versus 40% for single men and 41% for couples.
The group most susceptible to ending up in this situation are those who didn't save toward a retirement plan, according to Spencer Look, the center's associate director. Still, retirement advisors say even those who think they're prepared aren't.
It's a big problem, says JoePat Roop, the president of Belmont Capital Advisors, who has been helping clients set up income streams for their retirement years. What might surprise many is that one of the biggest mistakes people make isn't so much about how much they save but how they plan around what they save.
To be more specific, Roop says what catches retirees off guard is taxes and the lack of planning around them. Many assume they will be in a lower tax bracket once they stop receiving a paycheck. But from his experience, retirees often remain in the same tax bracket or could even end up in a higher one.
"It's wrong in so many ways," Roop said. After retiring, most people's spending habits either remain the same or go up. When you have more leisure time on your hands, more money goes toward entertainment and travel, especially in the first few years of retirement. The outcome is a higher withdrawal rate, which can push you into a higher tax bracket, he noted.
People spend their careers investing in a 401(k) or an IRA because they allow contributions before taxes. It sounds like a great perk when you can cut your taxes and defer them. The downside is that withdrawals will be taxed.
His solution is to add a Roth IRA, an after-tax account that allows gains to grow tax-free. This way, during a year when you need to withdraw a higher amount, you can resort to that account instead, he noted.
Another big mistake people make is moving money around in an inefficient way that leads them to incur more taxes than they should or lose on future returns. This can include choosing to withdraw a high amount of money from an investment account to pay off a mortgage or buy a house.