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Retirement is often romanticized as the time when hardworking Americans finally get a chance to slow down and enjoy a life of leisure, free from the worries and stresses of their last years.
And yet, this is not always the case, especially if people have not planned properly for their retirement, have poor spending habits, or are faced with unexpected expenses. Unfortunately, it is quite possible to find yourself in or near poverty in your later years.
GOBankingRates interviewed financial advisors, Joseph F. Meier spoke with Michael Ryan, certified financial planner (CFP) and president of Courser Capital Management LLC and owner of financial advisor and financial literacy website Michael Ryan’s Money, to discover the ways people become poor in their later years, so you can avoid them.
no margin of safety
Meier said the biggest contributor to people becoming poor in later years is not having a financial buffer for the unexpected.
“Unexpected is a broad term, so some things I’ve seen in my career include severe market disruptions and recessions, large housing repair expenses, or adult children who become financially dependent.”
Assuming that investment professionals can predict the future
Meier cautioned that market participants often assume that highly educated and highly paid investment professionals can predict the future.
“This flawed perception can lead to overconfidence about future market performance and create financial vulnerabilities.”
He shared this, based on research by Paul Hickey of Bespoke Investment Group and a 2020 New York Times article by Jeff Sommer, “Each December since 2000, the average forecast never called for a stock market decline during the following year…and yet the stock market lost money in six of those years.”
Pension elections that undermine stability
Your later years, especially retirement, are the time to take money from your pension. However, Meier warned, some pension choices could undermine the couple’s financial stability if one of them dies.
“The highest pension payout option is always when it is based on the life expectancy of a single retiree,” he said. “If the pension-earning spouse dies prematurely, choosing the highest payout option eliminates a key pillar of the couple’s cash flow.”
tying up wealth in your home
Homes can be an effective way to accumulate additional wealth, but homes also fall into the category of non-working assets.
As Meier explained, “This means that homes do not generate cash flow, they demand cash flow in the form of maintenance, taxes, insurance, improvements, etc.”
Thus, if a retiree is overcommitted to reaching retirement without a mortgage and has not saved enough in portfolio assets, “eventually they will find that their finances are falling apart until they sell their house… then they will have to go somewhere else!”
lack of financial planning
Michael Ryan said the most common issue contributing to poverty in later life is a lack of comprehensive financial planning at the beginning.
“Many people rely on quick guesses or simple projections without fully planning their needs over the decades. They fail to account for how much they need to save to maintain their lifestyle potentially 30+ years into retirement,” he said.
True financial planning considers all assets and income sources over time, he explained, and is also something that should be revisited from time to time.
underestimating inflation
Another major factor contributing to poverty is underestimating the impact of inflation, Ryan said. “Expenses do not remain constant—health, housing, food, and other costs increase significantly over time. People often look at the total savings accumulated without understanding how inflation erodes purchasing power.”
While people who have saved nearly $1 million may think that’s enough, he points out that it’s worth very little over 25 years. “Modeling different inflation scenarios makes it clear how devastating this could be.”
overly optimistic investment projections
Ryan also said that many people are overly optimistic about investment return projections.
“The assumption that 10%-12% annual growth is going to be troublesome is troubling,” Ryan said. “Average returns typically decline over time, often 6-8% depending on asset mix. And as age increases, investments typically become more conservative, reducing returns even further.”
In general, Ryan said, unrealistic return assumptions skew the estimates.
“There are many other factors that influence retirement planning, such as longevity risk and health care costs. But the main issues are the lack of comprehensive long-term planning, the failure to account for inflationary declines, and underestimating investment returns.”
However, barring unexpected crises, health problems, and the like, Ryan suggested that “With prudent planning and realistic assumptions, retirement security is achievable for most. But it requires diligence and help from knowledgeable advisors who anticipate decades. There are no short-cuts when planning for 30 years of retirement.”