A recent model from Morningstar’s Center for Retirement and Policy Studies reveals that 45% of Americans retiring at 65 are likely to run out of money before the end of their retirement. This projection takes into account health changes, rising nursing home costs, and demographic shifts. The risk is even higher for single women, with a 55% likelihood of depleting their funds, compared to 40% for single men and 41% for couples.
Spencer Look, associate director at the center, highlights that those without any retirement savings are most at risk. However, many who believe they are well-prepared for retirement are not as secure as they think.
JoePat Roop, president of Belmont Capital Advisors, emphasizes that one of the biggest mistakes isn’t how much someone saves, but rather how they plan around that savings. Taxes often catch retirees off guard. Many assume they'll be in a lower tax bracket when they retire, but Roop's experience shows that retirees can remain in the same tax bracket—or even climb into a higher one.
“It’s wrong in so many ways,” says Roop. After retirement, many people’s spending doesn’t decrease—it often stays the same or even increases. With more time for leisure activities, retirees tend to spend more on entertainment and travel, especially in the early years of retirement. This increased spending can result in a higher withdrawal rate, pushing them into a higher tax bracket.
Roop explains that many retirees spend their working lives contributing to tax-deferred accounts like 401(k)s or IRAs, thinking they are cutting taxes by deferring them. However, they forget that withdrawals from these accounts will be taxed. His solution? Incorporating a Roth IRA. Unlike traditional accounts, Roth IRAs are funded with after-tax dollars, and withdrawals are tax-free. By having a Roth IRA, retirees can pull from that account during years when they need to withdraw more, helping to manage their tax liabilities.
Another frequent mistake retirees make, according to Roop, is inefficiently moving money around. This can lead to unnecessary taxes or lost returns, especially when large sums are withdrawn to pay off debts like mortgages.
“There are IRS rules in place to benefit the government, not you,” Roop explains. A key example Roop shares is a client, Bob, who recently made a costly tax mistake. After a breakup, Bob decided to liquidate part of his IRA to buy a house. He opted to withhold the tax, costing him between $30,000 and $40,000. What Bob didn’t realize is that he had money in another account that could have been used for the down payment with no tax consequences. Roop had also planned to roll Bob’s IRA into an annuity, which would have paid a 10% bonus of $15,000. Bob’s decision could end up costing him between $45,000 and $55,000, in both taxes and missed opportunities.
The lesson here? Don’t be like Bob.
Another critical issue is sequence risk—the risk of withdrawing money from a portfolio when the stock market is down. Roop points out that while the S&P 500 has averaged around 10% annual returns over the past 50 years, no one can predict the exact sequence of returns. For example, if you retire with a $1 million portfolio and the market drops 15% in your first year of retirement, you’re left with $850,000. If you need to make withdrawals during this time, it becomes significantly harder to recover financially.
Diversification is essential, but owning stocks and bonds isn't enough. Roop advises that retirees should also include principal-protected investments like CDs, fixed annuities, or government bonds to avoid withdrawing from their portfolios during market downturns.
Gil Baumgarten, founder and CEO of Segment Wealth Management, agrees and stresses that many people run out of money in retirement because they didn’t take appropriate risks during their income-earning years. A low-risk strategy, such as keeping too much cash, generates poor compounding results. Cash is taxed as ordinary income and often yields low returns. In contrast, stocks typically generate higher returns and are taxed more favorably when sold, or not at all if held in a Roth IRA.
Baumgarten warns that many retirees don’t fully appreciate the long-term costs of inflation and rising expenses. “People don’t realize they could live another 40 years in retirement,” he says. “You can’t grow wealth by earning just 5%.”
Both Roop and Baumgarten emphasize that taking the right financial steps—whether it's tax planning, diversifying investments, or managing risks—can make a huge difference in how long a retiree’s money lasts.
