If I’m rich, can I still run out of money in retirement?
- Charlie Horonzy
- 3 days ago
- 4 min read
So you’ve worked hard, saved up, and you’re feeling like you’ve made it. You’ve got a couple million in the bank and in your investment accounts, and you’re feeling like you’re all set for retirement. Wrong-o! What if I told you that even rich people can go broke in retirement? Yes, I’ve seen it before, and in this blog I’m going to tell you the major derailers that could take you down.
But first – hello! I’m Charlie.
I help people retire in Chicagoland and across the country in a tax-efficient way. You may want to earmark these other blogs about financial planning for people in Illinois and other places in the United States.
And now – for the feature presentation!
If you’re not worried about going broke in retirement, figuring that you have too much money for that to possibly happen, here are the questions you should ask yourself.
How will my money decisions be impacted if I get cognitive decline?
Impaired financial decision making is one of the biggest risks you will face in retirement. Cognitive decline sets in gradually. You may not even realize it is happening until you send a wire transfer to the wrong place, or answer a call from a scammer pretending to be a relative who asks you to send over a large sum of money.
It’s scary. Here’s what you can do to prevent the risk of losing money in retirement due to poor financial decision making resulting from cognitive pairment.
The recourse we suggest is appointing a trusted contact on your accounts. This person will step in, with your approval, if you are unable to act competently regarding your money matters.
You should also ensure that you have a complete estate plan in place, prior to any dementia setting in. Once impairment takes hold, no estate plan can be created and what you have is what will be. If that means your assets wind up in probate or going to the wrong person (leaving your other beneficiairies to duke it out in court), so be it. If you haven’t sat down with your lawyer and fiinancial advisor yet, schedule a meeting.
A general precaution to take is to try to maintain as healthy a lifestyle as possible. There is no known single factor causing cognitive decline, but there has been research suggesting that healthy habits such as eating and sleeping well will lead you to a higher state of health, which may prevent the onset of these conditions. Check with your doctor regularly on this.
“How much am I truly going to spend in retirement?”
It’s easy to assume that what you spend now is what you’ll spend after you retire. You’re frugal, right? You wouldn’t have accumulated all this wealth in the first place if you weren’t!
Well, keep in mind one thing. You won’t be working anymore. Every day will be a Saturday, with nothing to do but spend money.
Do you have grandchildren? It’s hard to resist spending your life savings on them.
Most people have never sat down and looked at what it is likely they will truly be spending in retirement. In fact, most people don’t even know what they are spending now (before they retire). Fire up the spreadsheet, folks!
Overspending early in retirement is a huge problem.
Here’s why.
Let’s say you drawdown on your portfolio at the same time the market is down. By selling those positions to support your spending, you’d essentially lock in losses, reducing the base from which the portfolio would compound in the future. This magnifies the impact of overspending. You never know how long retirement can last – people are living well into their 90’s these days. Overdoing it early on will increase the risk of going broke as a retiree, even though you may be affluent today (or early on in retirement).
A financial advisor can help you assess what you are likely to spend. They have knowledge of how retirement withdrawals are taxed, how Medicare works, and how lifestyles tend to change once you retire. They will help you put the brakes on so that you don’t overspend early on and mess up your whole retirement.
“Do I know how much am I going to actually get once I start drawing down on my retirement savings?”
So you have all these investment accounts you’ve piled money into. Some are retirement accounts (Roth or Traditional IRAs, 401ks, etc.) and others are brokerage accounts (where you’ve been paying tax on capital gains and income throughout).
Now when you go to withdraw from them, it’s going to just be as simple as debiting the money out, right?
Wrong!
There are tax implications of all this. Two million dollars in a Traditional IRA does not necessarily translate into two million dollars withdrawn. There can be capital gains taxes on withdrawals from brokerage accounts, and withdrawals from retirement accounts are taxed at the ordinary income tax rate.
If you don’t know what tax rate you are likely to pay in retirement, you could be in for quite the jolt!
Yes, taxes are one reason people go broke in retirement. Fortunately they can be understood and planned for in advance, although there’s no way to ever predict with 100% accuracy what the tax piper will take.
A financial advisor can help you devise a tax-efficient retirement withdrawal strategy so you can answer this question and avoid stress from having less money after taxes than you thought, once retired.
Don’t be a broke retiree!
My name is Charlie and I help people retire in a way that minimizes what they pay to Uncle Sam, whether they are retiring in Illinois or elsewhere. I am a CPA and a financial planner. If you’d like to set up a time to talk about tax-efficient retirement planning for people in Illinois or elsewhere, please schedule a time.
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