You'll spend a lifetime saving for retirement, but all it takes is a couple of mistakes to find yourself in real financial trouble after you retire. Being constantly on your guard for ways to avoid financial hardship is essential in order to make sure you're financially comfortable during your retirement years.
To help you identify some of the key factors that lead many retirees to run out of money, we asked three Motley Fool contributors to weigh in with what they see as the biggest dangers facing retirees today. Take a look at all of their warnings, and learn how you can avoid a painful worst-case scenario.
Dan Dzombak: One easy way to go broke in retirement is living beyond your means. The general rule of thumb for a new retiree is that, if you're invested in a diversified portfolio of stocks, bonds, and cash, you can spend 3%-4% of your assets per year depending on how the market does. If you are above this mark, then you may be setting yourself up to go broke in retirement.
The traditional 4% rule may be too aggressive given how low interest rates are. The 4% rule was published in the 1990s by Bill Bengen, who researched how various withdrawal rates would affect retirees' portfolios under a variety of circumstances. His research assumed a 60% stock, 40% intermediate U.S. bonds allocation, and the rule was a simple 4% of assets per year adjusted for last year's inflation. At the time, however, both 10-year treasury rates and 30-year treasury rates were near 8%.
New research projecting returns based on current historically low interest rates -- 2% for the 10-year treasury rate and 3% for the 30-year treasury rate -- suggests that this rule of thumb may no longer apply. Planners now suggest that a withdrawal rate of 3% a year is more likely to survive a 30-year retirement. This means that, compared to a 4% withdrawal rate, you need to lower your spending expectations, or save more than you planned in order to maintain the same level of spending.
In general, the larger the nest egg you can save, the better. Your spending rate should be closer to 3% than 4% if you want your money to safely last a 30-year retirement.
Dan Caplinger: The biggest unexpected financial challenge that retirees ever face comes from medical expenses, which are by their nature both unpredictable and extremely costly. Even though Medicare coverage cushions the blow to a large extent, it doesn't cover all of your medical expenses -- so you have to make sure that you're in a position to pay for whatever Medicare won't pay.
In particular, two kinds of insurance coverage can help you avoid going broke in retirement from medical expenses. Supplemental Medicare insurance, also known as Medigap, covers things like copayments, deductibles, and co-insurance amounts on many of the items that Medicare traditionally covers. Medicare Advantage plans incorporate what traditional Medicare and Medigap cover into a single policy from a private insurance provider.
But even Medigap and Medicare Advantage plans don't cover everything. For help with nursing-home expenses, in-home nursing services, or other long-term care needs, you'll need to consider a long-term care insurance policy. These policies can cover a wide range of long-term care services, with costs varying depending on how long, and what level of coverage you get.
Insurance won't completely eliminate your medical expenses. But the right combination of policies will greatly reduce the chance of going broke in retirement because of healthcare costs.
Jason Hall: Debt in and of itself isn't necessarily bad. After all, it's how most of us are able to buy our homes, vehicles, or other big-ticket items that improve our lives and help us provide for our families. However, it's when we carry debt into retirement that we can get into trouble, especially because many people experience a drop in income.
A recent study from Harvard University's Joint Center for Housing Studies reported that, during the past two decades, the number of people over 50 and over 65 with a mortgage has increased significantly. The result? Almost half of retirees with a mortgage report having moderate to severe financial burdens -- meaning at least 30% of income is used solely to pay housing costs.
If you're approaching retirement, or even years away, it's important to find the balance between building up your savings and retirement investments, while also paying off as much debt as possible before you retire. Debt can help improve your quality of life; but if your income will fall in retirement, it could leave you broke.