Retirement Failure – What are the main causes of running out of money?

Since beginning my career in the 1990s, I have, unfortunately, seen several people run out of money in their retirement years. There are two main reasons:

1. Spending too much, even when told they can’t continue to spend as they are.

2. Letting emotional decisions devastate investment returns.

At retirement we have a new-found freedom, time and access to our retirement funds. For many there is no longer earned income but rather they are having to live on retirement savings, which does create limits on spending.

Have a Budget

Overspending in retirement lies with many root causes, a house that is too costly, lavish travel, a vacation home, being overgenerous in supporting adult children, or just general monthly spending being too high.

Conventional wisdom says to plan for retirement needs to be approximately 80% of pre-retirement spending. However, recent studies show that nearly half of retirees spent more in the first two years of retirement and 28% spent more than 120% of pre-retirement spending, with many continuing this high spending pattern into their sixth year of retirement.

Entering retirement, one must have a good understanding of what their current spending is and what it is projected to be. Many of us go through our working life without a budget. But in retirement a budget becomes essential. For some people, the word budget sounds time consuming, scary and creates anxiety. But running out of money will make the fear of a budget look ridiculous.

Stick to the Investment Plan

For our clients, investment performance has never been a concern of running out of money, unless they tremendously deviate from the strategy. This often means becoming frozen by fear, then selling and going to cash. I hear all kinds of reasoning for this, such as, “This President is going to kill the economy” (fill in the blank with any President), “the stock market is too high”, “I can’t go through another recession”. To rationalize the concern many will say, “But, this time is different.” Most often these are emotional responses and lead to a reaction that can harm the long-term retirement plan.

One can get caught up in what appears to be the trendy investment of the week. This can lead to being too aggressive and potentially permanently losing money.

It could also mean falling in love with one company stock and being overexposed.

This is especially true for investing in the company stock for which you work. A great example locally is GE. Many people that worked with GE experienced tremendous growth over many years. “It cannot go wrong,” they said. They had invested much of their retirement account in the company stock and purchased more in their investment account. Currently, GE is down 75% from its high in 2000. Overexposure can cause a retirement failure.

Putting a plan in place is essential. But sticking to the plan is just as important.

joe e. hines, jr. CFP