Retirees Are At Risk Of Going Broke If They Make These Finance Mistakes

Moving into retirement is filled with excitement, but it's also a time of incredible change. Change can be great, however, not all change is positive. Some retirees find that the preparations they made for this next phase of life were insufficient. Savings strategies are the first element to consider when planning your exit from the workforce. An inconsistent approach or a savings volume that isn't large enough to yield the nest egg you require can be major problems that leave you vulnerable long into your older years. But this is just one area of concern that retirees need to be wary of. In truth, there are plenty of ways that retirees can find themselves suffering financial hardship. Under certain circumstances, trouble in your planning and execution can even put you at risk of going broke.

Retirement finances are a tricky thing. Once you leave the workforce, returning to the job market can be exceedingly challenging. This means that financing the lifestyle largely comes down to how you care for your principal balance and carefully manage your drawdown strategy. Plenty of important factors play a role in the typical retiree's ability to set expectations and maintain them, though. These risk factors can ultimately creep into the picture and force you to draw out funds faster than you had anticipated. Moreover, even a significant savings portfolio can find itself at risk of insolvency if some of these question marks aren't answered during your planning phase.

No two retirees will share a perfect overlap in lifestyle goals or savings requirements. While in your working years, you'll have to tailor your own individual savings strategy to fit with the financial realities of your lifestyle in the moment and the aims you have for your golden years. A good rule of thumb is to save around 15% of your income for retirement, but everyone will have their own constraints and opportunities that come at varying times in life. Another way of looking at it is to aim for a savings target of about 10 times your income by the time you reach full retirement age. If you're an average earner in America today, you'll take home around $62,000 a year (the median figure to start 2025); this means you'll want to target a nest egg of $620,000 by the time you hit 67.

Failing to save enough to support your lifestyle needs when you get to retirement is a surefire way to find yourself running out of money. But this problem hinges on and understanding of what you need and a failure to meet it. What's perhaps even more challenging to your financial future involves a lack of proper preparation. If you retire early or even on time but either lack the plan to save in pursuit of these targets or don't know how to manage the funds in retirement, you are setting yourself up for a lengthy period of financial risk that isn't likely to subside.

The cold reality of retirement is that most people underestimate how much they need to save. 57% of savers worry they're behind on retirement savings (via a Bankrate survey) while many others have carefully calculated savings goals but are starting with a baseline figure that's too low. One issue that plagues many retirement planners' financial journey toward this transition is a misunderstanding of life expectancy trends. The life expectancy for men and women are different. One key discrepancy might come in the form of a married man saving for retirement and basing needs off of life expectancy figures for men alone. Women average nearly six years longer on this Earth than men in America so if these spouses follow typical aging trends the couple may not have enough saved to support those additional years for half the partnership.

Another problem revolves around the fact that life expectancy has continually crept upward. In 2000, the life expectancy of a typical American was 76.64 years while in 2025 it's 79.4. Another 25 years prior it was 71.96 (in 1975). Aside from the pandemic years heavily skewing these figures, life expectancy continues to climb at a gradual pace decade after decade. In a 2023 survey by George Washington University and TIAA, 53% of participants didn't have a good understanding of modern life expectancy. This issue may leave you planning for financial needs that will sunset before you do.

Saving for retirement isn't just about setting money aside and letting it grow. The value of compound interest can be found all over the marketplace of savings products. However, if you put all of your saved cash in a high interest savings account you're leaving an enormous amount of growth potential on the table. The most generous savings accounts today sit a little north of 4% while an investment in the S&P 500 nets an annualized return of over 10%, before factoring in inflation. That inflation rate tends to be the difference maker when it comes to these kinds of conversations. Your savings account will likely keep pace with inflation year after year, but it won't grow your real spending power.

Both of these approaches are lacking in another way. American savers have numerous tax-advantaged retirement accounts at their disposal. The 401(k) is a common asset for workers across corporate America. Almost 70% of employers offered retirement plans as of 2020, and numerous companies will match your contributions. Opting for a Roth account instead of a traditional option allows you to invest money that's already been taxed so you can avoid paying taxes on your distributions later. Having to suddenly cover medical bills or home repairs, for instance, might see you withdraw an increased volume of funds from your retirement accounts one year, only to see your tax burden skyrocket and force you to take more out the next to cover the bill.

Your debt load is largely unavoidable throughout modern adult life. 91% of Americans have at least one credit card, and big purchases like homes and cars depend upon financing products for the majority of buyers. Americans collectively owe $12.8 and $1.6 trillion in mortgage and auto financing loans, respectively. It's not a particularly good idea to retire with any ongoing debt carried into the transition. The more you have to pay lenders on a monthly basis the less you have available to fund the things you want to do and experience. However, the final few months or years of mortgage payments may not be a detrimental thing to manage in early retirement considering the amalgamation of other considerations involved in selecting the opportune moment to retire.

Credit card debt is different. This is the most expensive lending product you'll encounter, and coupled with other similarly excessive monthly payment requirements, this kind of revolving repayment obligation can genuinely sink your retirement finances. As a retiree, every penny is important and each dollar you are able to leave in your portfolio adds to the flexibility of your finances long into the future. Eliminating this kind of monthly repayment obligation helps extend out your financial horizon substantially. It's also worth noting that if you delay your retirement by an additional year to finish paying off these kinds of bills, you can add a year of additional savings, growth, and a delay that increases your Social Security check value to swing your retirement finances even further in your favor.

Medical expenses rise as you age, on average. Much in the same way that every saver will have their own journey to traverse, no two patients will experience the same kind of health care requirements. Some people age gracefully and smoothly while others do it with significant difficulty. Certain lifestyle choices and habits can play a role in determining your medical needs later on, but there's largely an element of randomness involved in the treatment requirements that you may have at any stage in life. Unfortunately though, increased need and expenditure tends to be the reality of older Americans. Cancers, for instance, frequently impact older patients in far greater numbers than younger ones. However, retirees can take advantage of numerous free cancer screenings covered under Medicare. There's also a trend toward general 'brittleness' for lack of a better word as you age. Older people require knee and hip replacements at a greater clip than younger Americans, for starters: The average age of a total knee replacement patient is 67.2.

Medicare is a valuable asset in managing these needs and expenses, but you will almost certainly have to shoulder at least some of the burden financially. If you haven't considered the impact of increased medical expenses as you continue to progress toward retirement, you may be setting yourself up for a financial cliff that suddenly presents itself while you're in a vulnerable state after a visit to the hospital. This can compound the hurt and leave you reeling.

One mistake that retirees may be at risk of making involves a decision that most people tend to shy away from. The choice to file for bankruptcy is not one that should be taken lightly. However, it is a financial outlet that can save you in extreme circumstances. Bankruptcy isn't a thing that deserves the social stigma attached to it. This financial measure can save your home or protect your retirement assets at a time when all seems lost. If you're headed toward foreclosure or feel you need to gut your Roth IRA in order to finish paying off a credit card bill that just won't go away, bankruptcy may be the outlet you need.

This tool allows you to discharge debts while either giving up certain assets or restructuring your repayment agreements in a way that allows you to keep your possessions and pay off a more manageable sum. It's important to note that money in your retirement portfolio can't be touched by creditors during bankruptcy proceedings. Similarly, your home isn't on the table either. In restructuring debt you may have to give up additional vehicles or other assets, but protecting the things you rely on the most to support your life and future while getting out from under the immense burden of extreme medical debt or credit card bills can be transformative. Not exploring bankruptcy options when you're under extreme financial pressure is a quirky but crucially important mistake that retirees can easily make.

An emergency fund is something that's often characterized as a way to keep your head above water if you lose your job. The days of the 'company man' who puts in decades of service with one organization are largely behind us. It's for this reason that the emergency fund is an all-important financial asset in the modern workplace. The ability to quit your job if conditions become unacceptable is hugely empowering. Similarly, a financial backstop to support you as you search for your next employment opportunity after a sudden layoff provides key mental and emotional stability in a time of great turmoil.

But emergency cash reserves aren't just something that workers require. Experts actually suggest doubling down. Instead of six months' worth of expenses, an emergency fund in retirement may seek to target up to one year of cost coverage, keeping in mind that your expenses at this stage of life are typically smaller than during your employment years. An emergency fund in retirement can help cover emergency medical expenses, new debt requirements, and most importantly changes in the stock market that force you to rethink your drawdown strategy. A bear market tends to last for roughly nine to 15 months. During this time, if you have the cash reserves to limit or entirely avoid selling stocks to support monthly expenses, you'll exit the downturn in a much stronger financial position. Notably, bear trading periods occur every 3.5 years, on average, so chances are you'll live through a few of them in retirement.

Many people consider downsizing when they retire. In general, a senior won't need as much total living space to call home as someone in their younger years. Many Americans follow a similar, rough outline in their changing lifestyle through the years. Adult professionals frequently get married and have children, demanding extra space in their home environment to support this family unit. Even people who remain single and those who don't want children tend to need more room to stretch out in their working years. You might need office space in your home or want a guest room beyond other parts of the house so that friends and family can stay with you when they visit. When you retire, many of these needs fall by the wayside and you might just find you're left with a home that's significantly larger than you require. A big empty house can feel lonely, and this kind of property can also ultimately become a drain on your finances, too.

There's property taxes to consider, an issue that can see your home seized by the government if things get particularly bleak in your financial picture. This can happen even if you paid off your mortgage long ago and own your home outright. Other financial strains include your electricity bill and things like heating and air conditioning. Downsizing also allows you to cash in on the value of this large property and move closer to family or areas that might support your hobbies.

Inflation is a constant problem that retirees must contend with. On the whole, salaried employees will see at least a cost of living adjustment to their compensation package on an annual basis. In retirement, your Social Security checks feature what is known as a COLA, which comes automatically and is calculated to account for inflation. Your investment portfolio doesn't have these same built-in security nets. The financial support you draw from your own investments must be tailored — by you — to your ongoing needs and will almost certainly involve a gradually increasing drawdown figure in an effort to keep up with the rising cost of everyday goods.

Managing this reality can be tricky. Workers will see the impact of inflation on the things they buy every day. But over time, pay bumps and job changes that result in higher salary figures will frequently offset long term stress that might otherwise come from inflation's impact. Retirees must create their own strategy to deal with inflation. One drawdown approach known as the 4% rule involves a conservative withdrawal rate, but one purpose-built to protect your assets against inflation. You might also consider investing in an annuity with an inflation adjustment built in to the payout rate.

As you age it's important to gradually shift away from riskier investments. The problem here isn't exactly the risk factor though. The name of the game is volatility. In retirement, in particular, you'll be frequently selling off assets or draining rather than reinvesting dividend proceeds to support your everyday consumer needs. This means that you don't have much appetite for stock market volatility. Selling when assets depreciate means you are getting less in value back out of your investments than you would when the price is higher. This means you'll lose money faster as you sell out of positions. If you are still heavily invested in volatile assets, the upside can be significant. However, you're more likely to find yourself selling during dips in the price, too.

During a bear market, for instance, a typical investor will want to hold firm on what they have invested already and add more stock buys to their portfolio while the assets they believe in are undervalued. Retirees won't typically be able to exhibit the same patience. If instead, you're invested in a range of safer assets like bonds, index funds, and even physical investment the categories, you'll have less volatility to worry about and prices will remain relatively stable even during poor performance stretches.

On the other hand, it's important to stay in the stock market and in other asset classes that achieve decent growth. You don't want to shift entirely out of risk because you are then exposing your finances to the downward pressure of inflation under its full weight. It's essential to keep an element of growth in the background of your portfolio. Although, it's not necessary to stay engaged with individual stock selections or aggressively pursue niche opportunities. Index funds and ETFs are often a quality solution in this regard. Those who have invested in real estate in the past might also consider REITs.

REITs trade like index funds but bundle up real estate holdings instead of company stocks. This allows a retiree to continue cashing in on what is essentially real-estate-driven income while shifting out of the riskier options in this part of the market. REITs can even make for a solid dividend-focused portfolio because they tend to offer higher payout rates than other solutions. Index funds and ETFs bundle up dozens, hundreds, or even thousands of individual company stocks to deliver quality growth without the downside potential of stock picking.