By Edd and Cynthia Staton
Watch out for these 4 major financial pitfalls
Americans fear running out of money more than death itself. Are their concerns justified? The convergence of two major societal trends – an increase in the number of older adults and a looming Social Security crisis – suggest the answer could be yes.
The number of centenarians went up 50% between 2010 and 2020, from 53,364 to 80,139, according to the most recent data from the U.S. Census Bureau, and is expected to multiply fourfold over the next 30 years.
The Social Security system, which was created in the 1930s, set the retirement age at 65 – at a time when the average life expectancy was 62. Now with life expectancy near 80 and many Americans living even longer than that, the program is veering toward insolvency. If Congress does not act, the program’s trust funds could run out of money by 2032, the latest trustees report said.
Compounding these issues, a recent Gallup poll reveals that people planning to retire at age 66 are often forced to stop working earlier, at age 62, “due to a plethora of reasons, primarily health considerations – their own and those of their loved ones,” said Robert Johnson, a finance professor at Creighton University’s Heider College of Business.
Social Security isn’t the only thing that is outdated. Many people will spend 25 to 35 years in retirement – yet millions continue to approach financial planning as if it were still 1965, when retirement was more likely to last only 13 years. The result is a growing disconnect between longevity and preparedness.
Here are four major financial pitfalls to be aware of.
1. Your expenses may go up faster than Social Security’s COLA
Social Security’s cost-of-living adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which factors in the spending patterns of younger, working households. “However, retirees typically spend their money differently, with a much greater portion of their income going toward healthcare and medical costs,” said Veronica Taylor, a financial planner with Ellevest, a wealth-management platform designed by and for women.
The result? Even though Social Security’s cost-of-living adjustments are meant to protect purchasing power, “they’re calibrated to the wrong basket of goods for older Americans,” said Ronnie Cox, investment director at Human Interest, a financial advisory service. “The gap tends to widen quietly over time, and most retirees don’t notice it until it’s already eroded their budget.”
Many argue that the Consumer Price Index for the Elderly, or CPI-E, which was created by the U.S. Bureau of Labor Statistics in the 1980s, is a superior tool for calculating COLAs. Resistance to adoption of this index primarily stems from the fact that, without other changes, higher payments would worsen the problem of Social Security’s possible future insolvency.
2. You might need to rethink the 4% withdrawal rule
The 4% rule was developed in the 1990s and is still widely used by retirees. Designed to allow retirement savings to last 30 years, it advises withdrawing 4% of the total in the first year of retirement. In subsequent years, the dollar amount is adjusted to keep up with inflation.
Advisers today consider this guideline outdated and oversimplified because it relies on static assumptions that don’t reflect modern retirement realities such as longer life expectancies, unexpected healthcare expenses and market downturns.
“Actual behavior for retirees depending primarily on portfolio withdrawals doesn’t match the model anyway,” Cox said. “Their withdrawal average is closer to 2%, roughly half the guideline. Why? Because drawing from a portfolio instead of earned income feels psychologically different. Retirees with Social Security or pension income tend to spend more freely.”
While the 4% rule remains a useful starting point in retirement planning, “the most effective withdrawal strategy is one that fits your lifestyle, spending needs and overall financial picture rather than relying on a rule of thumb,” Taylor said.
3. You could be underestimating your financial blind spots
After an initial splurge on travel and entertainment, retirees are often lulled into a sense of complacency because their spending tends to decrease during the first decade after leaving the workforce. But a creeping loss of purchasing power coming from multiple directions can catch them by surprise.
Inflation. Even modest 2% to 3% annual inflation rates can cut buying power nearly in half over a 20- to 30-year retirement. People who depend on fixed-rate pensions or flat-rate annuities are the most adversely affected, because those do not incorporate inflation into their payments.
Housing. The majority of senior citizens have a strong desire to age in place but ignore the ongoing costs of home modifications, property taxes, insurance premiums, maintenance and repairs.
Debt. Nearly six out of 10 Americans carry a $32,050 median balance of debt into retirement, with high-interest credit cards being the most common form of debt. This burden strains cash flow and leaves little wiggle room for unexpected expenses.
Healthcare. People retiring in reasonably good health “fail to account for how steeply healthcare expenses can climb in their late 70s and 80s. Long-term care alone can upend even a well-funded retirement plan,” Cox said. Many assume they will always be able to live independently and are shocked to learn, when assistance is required, that Medicare does not cover long-term care or assisted living.
4. You might need to make difficult tradeoffs when savings fall short
After decades of looking forward to the freedom of a less stressful lifestyle, it is disheartening to be faced with difficult choices when income and savings fall short.
Reducing discretionary spending. Scaling back travel plans, hobbies or other long-envisioned activities. Downsizing or moving to an area with a lower cost of living. Curtailing financial support for adult children or grandchildren. These are some of the repercussions when retirees are faced with financial challenges.
In the most extreme circumstances, “those tradeoffs can be stark,” said Joseph Fernandez, president of Invenio Wealth Partners, a wealth-management firm. “Food versus medicine, healthcare versus housing, leaning on family for financial support – all of which can be very difficult at a personal level and can strain family relationships.”
More people are delaying retirement, with workers 55 and older increasing from 15% to 23% of the workforce since 2006. “Working even one or two additional years can have a significant impact,” Taylor said. “Doing so allows more time to save and for investments to grow, while reducing the number of years you need to draw down from your savings.”
Regarding personal finances, retirees often face the same set of choices. “They can spend less now and hope the math works out, take on more portfolio risk in search of growth or rely more heavily on Social Security by delaying benefits as long as possible.” said Cox. “The most resilient retirement income plans combine several of these elements.”
Practical financial steps people in their 50s and 60s can take
Experts recommend employees over 50 maximize catch-up contributions to tax-advantaged retirement accounts such as a 401(k), 403(b), 457(b) or IRA. “If you have access to a health savings account, consider maximizing those contributions as well,” said Taylor, “as they can provide tax benefits today and in retirement.”
If you decide to take out a long-term-care insurance policy, don’t wait too long. Premiums skyrocket when enrollment is delayed until later years, because insurers must account for the higher probability of the insured person making immediate claims, giving less time for the insurer to collect and invest premiums.
And don’t take your eye off the ball once retirement starts. That nest egg needs to last the rest of your life.
“People in their 50s and 60s often believe the investment time horizon ends upon retirement,” Johnson said. “Their biggest financial mistake is taking too little risk, putting savings in money-market accounts or low-risk bonds. The surest way to continue building wealth over the long term is to stay invested in a diversified portfolio of common stocks.”
-Edd and Cynthia Staton
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07-29-26 1521ET
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