Nearly half of Americans retiring at 65 risk running out of money, according to Morningstar. Single women face a 55% chance of depleting funds, higher than single men and couples. Experts advise better tax planning and diversified investments to mitigate retirement risks.

According to a simulated model that accounts for factors such as 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. Retirement advisors say that 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. However, retirees often remain in the same tax bracket or could even end up in a higher one. After retiring, most people’s spending habits either remain the same or increase.

More leisure time often means more money spent on entertainment and travel, especially in the first few years of retirement. This results in a higher withdrawal rate, which can push retirees into a higher tax bracket. A recommended solution is to add a Roth IRA, an after-tax account that allows gains to grow tax-free.

During a year when a higher withdrawal amount is needed, this account can be used to avoid additional tax burdens. Another big mistake is moving money around inefficiently, which can lead to incurring more taxes or losing future returns.

Retirement risk higher for single women

A common error includes withdrawing a high amount of money from an investment account to pay off a mortgage or buy a house. For instance, a case was cited where a retiree liquidated part of an IRA to buy a house, incurring between $30,000 and $40,000 in taxes. The advisor had planned to move the money to an annuity that would have provided a bonus.

The overall financial loss from this mistake was significant. Sequence risk occurs when retirees withdraw from their portfolios during a market downturn. According to JoePat Roop of Belmont Capital Advisors, the market’s performance can greatly influence retirement funds.

If significant market drops occur shortly after retirement, the recovery time needed can dramatically affect the funds’ longevity. Diversification should include investments that are principal-protected, such as CDs, fixed annuities, or government bonds, to avoid depleting the portfolio during bad market periods. Gil Baumgarten of Segment Wealth Management notes that a lack of appropriate risk-taking during earning years is another factor.

Holding too much cash, which earns low interest and is taxed higher, is ineffective for long-term wealth growth. Stocks typically provide higher returns and are not taxed until sold or potentially not at all in Roth IRAs. Proper risk involves higher exposure to stocks through mutual funds or index funds and investing in blue chip stocks.

Avoid the mistake of investing in highly speculative ventures that could lead to significant losses. Planning for retirement requires strategic tax planning, efficient money management, appropriate risk-taking, and diversification across both stocks and fixed-income investments. Avoiding these key mistakes can help ensure financial stability throughout retirement.

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