4 Ways Retirees Run Out of Money Too Soon
Retirement should be a time to enjoy financial security and not stress over cash flow. That said, some common money mistakes may be putting boomers at risk.
Even those who have diligently saved for decades can run into trouble if they're not managing their withdrawals, spending habits or investment strategies wisely.
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From underestimating inflation to relying too heavily on Social Security, certain missteps can drain savings faster than expected. Here are some cash flow mistakes boomers are making with their retirement savings -- and how to avoid them.
Not Timing Your IRA Tax Withdrawals
A common mistake retirees make is not taking IRA withdrawals in low tax years, according to Matt Hylland, a financial planner at Arnold and Mote Wealth Management.
"If a majority of your savings is in a traditional IRA, your tax liability will likely increase as you age. This is because of RMDs (required minimum distributions) and the onset of other income, like Social Security."
While withdrawals from IRAs are taxed as income, retirees with no other sources of income can very likely take out withdrawals at very low tax rates, Hylland pointed out.
Waiting to withdraw from your IRA until you start claiming Social Security benefits can incur tens of thousands of dollars in additional tax liability each year, Hylland said.
Not Thinking Through Tax Strategies
Waiting until you reach retirement to start figuring out your tax strategy may put you in jeopardy, Hylland said. "Many retirees have spent decades trying to defer taxes as long as they can with their 401(k)s. But once you enter retirement, your optimal strategy may very well be to prioritize IRA withdrawals, and purposely pay some taxes."
He said retirees often use cash savings, brokerage accounts or even Roths early in retirement to keep a very low tax bill. "While that may save them some money in the short term, it can be very costly in the long term."
The reasons are that delaying RMDs can lead to higher taxes later by pushing retirees into a higher tax bracket. Additionally, if retirees keep their taxable income too low early in retirement, they could miss the chance to convert pretax retirement savings into a Roth IRA at a lower tax rate. Lastly, Social Security benefits become taxable if the total income exceeds certain thresholds.
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Playing Safe Yet Losing Anyway
Another problem is when retirees act too conservatively and fail to consider the tremendous impact of inflation in the first five to seven years of their retirements, according to Myles McHale, an adjunct professor at Cannon Financial Institute.
"High inflation early in their retirement journey will force higher withdrawals from their retirement portfolio," he said.
Not Accounting for Longevity
McHale said many boomers don't realize they could spend more years in retirement than they did working.
"Longevity will be the biggest factor impacting boomer retirees," he said. He recommended they start working with advisors who can build holistic strategic plans, no matter what stage of retirement they're at, a process his institute refers to as "aging with grace."
He explained that a plan of that kind can cover such important elements as:
Applying financial wellness principles to develop comprehensive transition plans for aging.
Identifying and addressing key risk factors, including diminished capacity, elder abuse and family dynamics.
Demonstrating effective communication techniques for conducting difficult conversations with family members.
Developing and implementing practical solutions for housing, transportation and safety needs.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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