The Realities of Running Out of Money in Retirement

Running out of money in retirement is the #1 concern amongst pre-retirees and retirees today. According to a study released by the American Institute of CPAs, 57% of financial planners state that running out of money is the top retirement concern for their clients. At Pathway Financial Planning, we have noticed this to be overwhelmingly true in clients at every stage of their retirement savings planning.

Running out of money in retirement is unfortunately a reality many people face. What’s most important is for financial advisors and individuals to work together to plan in a way that reduces or eliminates this risk. It’s vital to plan ahead and never too early to work with a financial planner and prepare your finances for retirement.

Recently we were approached by a woman in her early 70’s (let’s call her Sue) and her story is important. Sue’s experience is a common one that many retirees face. Perhaps through reading it you’ll feel motivated to take some action.

A tough financial situation

Sue is full of life, active in her family, and embodies so much experiential wisdom. She has led a fascinating life filled with rich fulfilling memories. Unfortunately, Sue came to Pathway Financial due to some real financial concerns. Before the age of 80, she was down to about $20,000 in her retirement nest egg.

Her husband had passed a few years prior and she had a mortgage that was higher than her home’s value. Another tough financial burden was a second property she owned that was not producing income and in need of repair. To round things out, Sue had a history of being extremely generous by helping family members financially.

In the beginning of retirement, Sue and her husband had a fairly healthy retirement nest egg of around $250,000. Between fairly sustainable nest egg distributions and both of their social security benefits, the early years of their retirement were “comfortable.” Unfortunately, towards the end of her husband’s life, he required nursing home care which is when finances began to get tight.

Finances unraveling

Neither Sue nor her husband had purchased any long-term care insurance. In order for Sue’s husband to qualify for Medicaid, some of his social security had to go to the cost of his care. In addition, Sue had to “spend down” a majority of their retirement nest egg, again for Medicaid qualifications purposes. Initially, she was able to retain about $100,000 in their retirement nest egg through some last-minute long-term care planning.

Unfortunately, these stresses were only beginning. Sue began withdrawing a higher dollar amount and percentage from her retirement due to losing some of her husband’s social security benefits. The support she’d been giving to family members did not subside and possibly accelerated some. It was a bad situation and Sue didn’t know what to do. With assets almost completely exhausted and too little income from social security Sue was in a tough spot.

How you can proactively avoid this outcome

There are some key things Sue and her husband could have done to avoid this financial situation. First, they both turned on social security at 62. At the time, their combined social security benefit, along with moderate nest egg withdrawals, was enough to maintain their standard of living. One thing to consider for couples is that one of the two social security benefits will go away if one person should pass away and decrease or completely go away when one spouse requires long term care. A couple’s decision on how to coordinate their social security benefits is one of the most important decisions they will make regarding retirement.

Another thing to consider is that long-term care is a major financial risk, especially when there is a large age gap between spouses. It’s important to examine your situation closely with a financial planner to clearly understand how long-term care or passing away prematurely can affect a surviving spouse.

Two potential options:

  • Fund a long-term care policy: With a long-term care policy purchased by distributions from your retirement nest egg you can feel more secure in your finances.

  • Purchase a life insurance policy: A life insurance policy can recoup assets taken from the nest egg for long-term care.

Before you find yourself in a situation like Sue’s, taking advantage of either of these solutions can provide you with much better circumstances to work with. Working with a financial planner to identify exactly how much insurance to buy and how to most efficiently pay for the insurance can also be extremely beneficial. Planning ahead and hiring a professional can help you reduce the risk of running out of money in retirement.

How a financial planner can help

A financial planner knows where you are spending your money and can help guide you to smarter financial decisions. In Sue’s case, a good financial planner would have cautioned her of the risk associated with providing financial support to family members. It’s important to work with someone who will help guide you through the planning process, so you are set for success throughout retirement. Creating a plan for long term care expenses and choosing the best life insurance policies are just a few examples of ways a planner can be valuable.

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