Retirement is one of the major end goals for many of us. After putting in a few decades of hard work we hope to be able to break free from the daily grind and do what really makes us happy. That could be starting a new career, traveling the world, or simply enjoying a slower paced lifestyle. Whatever your idea of retirement is, there are plenty of roadblocks standing in your way.
In a perfect world you will have enough money set aside so that come retirement day you have absolutely nothing to worry about since you have have figured out how much to save for retirement. In the most perfect of worlds you are saving too much for retirement. You’re free to carry out your plans without the added stress of wondering whether or not you’ll have enough money to pay the bills, or uttering the words “I am broke” or “I can’t pay my bills” in retirement. Unfortunately, most people don’t have this luxury. Instead, they come to the realization that they can’t afford to retire and end up spending the later years in their life unhappy because they have to either keep working or simply don’t have enough money to do any of the things they had hoped. Here are five reasons most people will retire broke and unhappy.
1. Not Saving Enough
Not saving enough has to top the list because let’s face it, not having enough money in retirement is the biggest problem. How much money do you really need to have saved up by retirement to fund your dreams? Well, according to a recent poll I took on the site most people feel they need between 1 and 3 million dollars saved by retirement. So, ask yourself where you stand. Do you need to figure out how to become a millionaire? Are you on track? Do you have some catching up to do? Or do you feel there’s just no possible way to save up enough money by retirement? Even if you are behind in savings that doesn’t mean you should give up. You still have many years ahead of you to make a difference, and every little bit counts. One thing is for certain, and it’s that not having enough money saved for retirement will have a negative impact on your lifestyle down the road.
If you don’t have enough saved up for retirement a few things are certain:
- You may have to work longer.
- You may not be able to do the things in retirement you planned on.
- You may become a burden on your children.
- If you encounter serious health problems it could mean liquidating your assets and going on Medicaid.
If none of those things sound like fun you better start saving. Even if you’re in your 30s and haven’t put a penny aside for retirement it isn’t too late. Take advantage of your employer’s retirement plan such as a 401(k) or 403(b) if they offer one. This is the easiest way to get into the habit of saving since it comes right out of your paycheck and it’s pre-tax money. Even better, if they offer a match you need to at least save enough to get the match. That’s free money! This is the only time someone else will put money into your retirement account for you, so don’t miss out.
Beyond that you should set up your own retirement account such as a Traditional IRA or Roth IRA. It doesn’t matter if you can only afford to put a hundred dollars a month into your account, but you have to start somewhere. Even just $100/month over 30 years earning around 7% will put over $120,000 in your account. Sure, you won’t be able to live off just that, but you can’t tell me that having an extra $120,000 for retirement is a bad thing. So, start small, and start right now. Every little bit helps even if you are getting a late start when it comes to saving.
2. Making Poor Investment Choices
Did you know that you can be on track to save enough yet still find yourself in the poor house come retirement? Just ask all of the baby boomers who planned on retiring in the next few years and were invested too heavily in stocks. Their retirement plans were destroyed in a matter of months. Granted, we don’t have crystal balls and can’t predict what the markets will do, but you can follow some basic investing principals so that you’re not putting yourself at unnecessary risk.
Poor investment choices go both ways. You have those who might be far too aggressive and can’t whether a steep decline shortly before retirement, and you have those who invest far too conservatively from the start and come up short in the end. You need to strike a balance and adjust your investment strategy over time as you age and your needs change. There’s no magic portfolio that works for everyone, in all market conditions, all the time. But it’s up to you to understand what you’re investing in, what the risks are, and how those investments play a role in your long-term objectives.
Finally, don’t neglect fees. You can’t invest without fees, that’s just a fact of life. But in most cases you can limit how much you pay. It may not seem like much, but even choosing investments with 50 more basis points in annual fees could literally cost you over $100,000 by retirement. The sooner you make smart investment choices and understand the impact of fees, the longer your money has to grow so that it can adequately fund your retirement.
3. Neglecting Health Care
Want to retire broke and unhappy? Just ignore the impact that health care will have on your retirement. As a member of Generation X you may have seen this first hand with aging family members. Even when it looks like someone has set enough aside for a comfortable retirement it just takes one major health incident to derail everything. This country obviously has some flaws with its health care system, but that doesn’t mean you have to just take it.
Health care issues can ruin your retirement before it even starts. Did you know that disability is the number one reason for bankruptcy and foreclosure in this country? If you’re still working and rely on your income to pay the bills what happens if you get hurt or become disabled, either for a few years or permanently? In many cases people don’t have disability insurance and even if they qualify for Social Security Disability it isn’t enough to pay all the bills. Just a two year disability in your 30s could be enough to severely impact your retirement, especially if it causes a financial hardship such as bankruptcy or foreclosure. So, make sure you’re adequately protected even while working so that you don’t jeopardize your retirement.
An even bigger problem often comes in retirement. Our health is unpredictable for the most part. We don’t know what kind of health issues we will develop as we age, and depending on what it is and treatment required it could end up quickly draining your retirement fund. Don’t just assume that having Medicare and a Medicare supplement will do enough to cover most of your medical expenses. If you are in a situation where you need long-term care you’ll find that this isn’t covered by Medicare. And don’t be fooled by the name, but most long-term care stays are only a few years. But did you know that the average cost of a year of long-term care is upwards of $50,000 or more? Just needing a few years of care could quickly begin to wipe out your retirement nest egg. If you run out of money paying for this care you’ll either become a burden on your family while they try to pay for or provide the care. If they can’t keep up you’ll be faced with liquidating any assets you do have, and then will likely end up on Medicare. I don’t think anyone looks forward to that kind of retirement.
Finally, a little preventative health care goes a long way in helping you live a long and healthy retirement. Take some time while you’re young to make smart health choices today so that you’ll have a better chance of remaining healthy in retirement. Some good habits today could end up saving you hundreds of thousands in health care down the road.
4. Retiring Too Early
Raise your hand if you’d like to retire earlier rather than later. Stupid question, right? For most of us we’d love to retire a few years early and get a jump on doing the things we planned on in retirement while we’re still young and healthy. Unfortunately, early retirement is simply in the cards for most people. It really comes down to underestimating what just a few years of early retirement can cost financially. For example, say you and your spouse would like to retire at 62 instead of 65. Assuming you each earn $50,000 after taxes at your current job those three years of retiring early will cost you $300,000 in lost income. Even if you elected to begin drawing Social Security at 62 that isn’t going to come even close to replacing that income. If you have a pension, chances are taking it at 62 is also going to be a reduction in payout. So, depending on what your income needs are during those three years you could be draining your retirement account by a few hundred thousand. When you factor in the 20 or more years you still have in retirement that early retirement could significantly reduce how long your nest egg will last.
And it isn’t just about tapping into your retirement assets early. Let’s not forget about health insurance. You don’t qualify for Medicare until 65, so if you retire early where are your health benefits coming from? If you’re lucky enough to have a working spouse you might be able to get by using their plan, but what if you both want to retire early and you don’t have any retiree health benefits offered by your employer? Get ready to open your wallet and pay for an individual plan. This is a common oversight by many early retirees as they get dead set on retiring early and then underestimate the significant costs of health care until reaching age 65. This can be a costly mistake.
Retiring early is doable, but you have to plan well in advance for it. That means saving even more money and thinking about the impact of early retirement, both in terms of your nest egg and health care. If you rush into it like many people you could be giving up a significant chunk of your later retirement just to quit working a couple years early. Weigh your options carefully.
5. Lifestyle Creep
It’s just human nature that as you earn more money and become more successful you generally spend a little more money on the finer things in life. After all, isn’t that what it’s all about? You want to make more money so you can enjoy some of the fruits of your labor. It’s great to be able to buy things that improve your quality of life, but this lifestyle creep can go too far. It starts out with small stuff, but eventually it turns into a bigger house, nicer cars, and maybe even more elegant vacations. If your income goes up but your expenses also continue to go up the net result is often zero. You make more, spend more, but still don’t have enough left over to save more.
As you go through your career and begin making more money it’s important to keep your spending in check. You still might opt for a nicer car or a bigger house, but don’t let those things interfere with your ability to save. When you start making more money make sure you treat your retirement savings like any other expense. If you’re willing to spend 20% more on a new car payment you should be willing to put 20% more into your retirement account as well.
If you don’t increase your saving along with your other expenses you’re going to be in for a rude awakening upon retirement. What you’ve done is built up this more affluent lifestyle and when retirement comes you’re probably hoping to at least maintain a similar lifestyle but without going to work. If you haven’t been increasing your saving over the years to match the increase in lifestyle, guess what. You’re not going to have enough money to fund that retirement. Then you’ll probably find yourself unhappy in retirement since you had to reduce your lifestyle or try to continue that lifestyle and end up broke ten years into retirement. Neither of which is a situation you want to be in.
Will You Retire Broke and Unhappy?
Hopefully not, but as you can see, it’s pretty easy to do. While it’s easy to retire broke, it’s just as easy to start putting measure in place today to ensure it doesn’t happen to you. Start by saving more. Think you’re already saving enough? Think again. Even if you’re just getting started for the first time, every little bit helps. Now that you’re saving you need to make sure you’re investing it properly. Take some time to learn about your investments, understand what they are going to accomplish, and keep expenses low. Next, don’t underestimate health care costs both now and in retirement. Take steps today to make sure poor health won’t drain your retirement fund. If you want to retire early, make sure you plan for it. Early retirement requires additional savings and considerations when it comes to health care. And finally, don’t let lifestyle creep during your working years ruin your retirement. Keep spending in check and adjust your saving accordingly so there are no surprises in retirement.
If you can keep up with all of that you should be able to enjoy a wealthy, happy, and comfortable retirement.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I gave up on looking for work. In my 30's Crushed by student debt out of work for over 6 years. Are you going to hire me? I think not. So why even bother? I am a burden of the state now. Money is our God and Greed is our religion. Period. I am retired and get social security disability and in a fight to file bankruptcy on my student loans. I tried to do all the right things and ended up nearly as bad as convicted felon. Starving in Africa or this in America? Tough to say... I will retire broke and unhappy, and you the tax payers are paying for my "unhappy"! Aka Social Security + massive professional help. So far used nearly $250,000 of tax payers money (hey they said for me to get professional help...so I did at $450 an hour billed to Medicare + several hospital stints for depression at $50,000! and still depressed. Imagine if I could of made that at a job. You could of hired me. Tax payers could of just forgave my student loans and I would of been happier and far cheaper.. But nope.
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Which is worse: dying broke or living a life that I hate because I'm so worried about having enough for retirement that I can't enjoy my life? And what if I die before retirement? Before I have my pre-death play time? Boy, will I be mad.
Retirement is more a state of mind that a state of financial condition. Retirement is something different for everyone. I did a year of research asking the question...what does retirement mean to you....the common answer was..."to do the things I want to do when I want to do them". My Wife and I retired without any money in the bank when I was 49..now I'm 55 and I'm still retired and still have no money in the bank. I own a home in FL and one in Minnesota. It is possible for anyone to have this life style but you have to be willing to make some simple changes in life. Don't get all concerned about saving...as you will still be doing something after you decide to quit your job anyway. Is it possible to retire at 50 broke.....yes!!! I've been doing it for 5 years now.
Excellent article, and I'm glad you tied in health care and health issues. It's not going to much matter if you die of a heart attack or Type II diabetes the same year you retire.
Some great suggestions in there. I personally am taking my retirement savings seriously and have by living very frugally been able to increase my savings to 60% of my gross earnings. I'm targeting a very early retirement.
Achieving this high rate has been partly achieved by watching my Lifestyle Creep as you identify in Point 5. As I achieve pay increases I have actively decided not to change my standard of living.
I am also actively watching my fees paid on my account as you identify in Point 2. Compound interest is a wonderful thing and by paying more fees than you need to will really hurt your potential wealth.
Great article. I tell people in my church all the time that prosperity is not just about working hard. There is so much more involved.
Great tips. I think you are right when you say that most people in our generation have high expectations of retiring with millions, but will be rudely awakened to find that they didn't do what was necessary NOW in order to make that a reality.
thanks for the post.
Brad you are totally correct - but human nature (at least the current version) wants to SPEND - CONSUME - COMPETE. Heck my brother lives in South Carolina so no need of a special car for the winter (like some sports car drivers in northern climes) BUT - two drivers - THREE cars. The average North American is what? 57 days from bankruptcy. You are seemingly in the insurance business (as I am) so you are no doubt familiar with the "Buy Term and invest the difference" objection to whole life insurance. I will not argue that IF YOU DO IT, you may well get better results - but the problem is ALMOST NO ONE DOES IT.
All the threats noted in the post are significant, but not saving enough definitely takes the cake. The entire post could have been dedicated to the topic. If a person has an income stream, there are really no excuses for them not savings a portion of that for a rainy day or retirement. There are so many options available nowadays for people to defer their pay, whether that is a company-sponsored plan, individual IRA or simply a saving account. Everyone should pay themselves first. Set up a direct deposit into an account, so you never touch the funds and are tempted to spend.
I think it's great if you can work at something you love doing in your retirement years. However, while I plan to work a little after offically retiring I am not counting on it. I may become ill, or have to take care of my parents, or have some other reason that would prevent me from working. SO, when I use a retirement calculator I enter 0 for income from a job. I also assume 0 paid in Social Security benefits.
i certainly dont think that i will retire broke or unhappy because all the time i work invest or spend, i more often than not have the future at the back of my mind. While i have never really looked as to why the baby boomers lost everything in the stock market crash, i have an inkling that a better financial base could have prevented or completely averted the catastrophic financial meltdown that most experienced. To avoid a repeat of this in my life, i am aggressively doing a lot of independent study on investing and business. If things work out i will retire relatively soon with the worry of lacking money burning in hell.
We're obviously operating here under the assumption that we are going to retire. I'd like to present the alternative view that if you play your cards right, you won't retire at all. If you manage your career well, retirement will be a non-issue for you, and you probably won't want to retire.
I don't mean your career as in the job you do, but as in your entire professional life. This includes any jobs you'll have, any professional affiliations you'll be a part of, and any working relationships you'll establish.
If you're someone who is always looking to proactively advance their career, you'll eventually end up doing something you actually like to do. Chances are, that something will not require manual labor, as more and more jobs are becoming information-based and services-based as technological enhancements are able to take care of the physically laborious tasks.
So not only will you get to where you want to be professionally, but you'll be able to do the work you love for a lot longer. I think because of this, we'll see people wanting to forgo retirement. Thoughts?
Speak for yourself! I'm thinking filthy rich and ecstatic myself! :)
People die broke and unhappy because of their own doing often times. Hence, they may actually BE HAPPY b/c they had a great time in the process!
To Goran Web Net Age - I hate to say this but the healthiest people are the ones most likely to need Long Term Care - and to have large end of life bills - because our bodies will not break down. We are the ones most likely to suffer from Alzheimers - or to fall and break a hip - Obese smokers are more likely to die fast
While my husband and I are actively looking ahead and saving for retirement, we are also looking at things from the perspective of what we might be able to do in the future. As a professional writer with my own business, I won't need to "retire" in the traditional sense, and I can always do a little work from wherever we are to pad things out. My husband has chosen a field in which he can consult after he gets professional experience. We wouldn't be happy retiring and then trying to figure out what to do with our time. Instead, we have chosen career paths that are flexible and will allow us to continue making money as we age.
Health care is one of the things which is going to affect all of us at one stage or the other, the best advise here is to make the healthiest lifestyle choices possible, not smoking and drinking, observing a healthy diet, getting exercise, etc, etc.
I know I'm definitely guilty of "lifestyle creep." It's so easy to get caught up in the extravagant things that life offers. I think keeping in mind to save when possible will help eliminate that habit. Thanks for this article.
Don't forget to include the top reason why you'll retire broke is that the federal reserve is scam that drains our wealth.....
Another reason you missed: chances are you're going to live longer than you think. Research constantly points to the fact that our lifespans are getting longer and longer. If you plan on living to 85, what happens when you live to 95 or beyond?
Lifestyle creep is a real issue. Oftentimes as income increases so does our list of debts. It really takes some courage to say 'no' to this temptation, but it's worth it if you put the money in assets (things that increase in value). Good post!
Broke and unhappy might be better than not getting there at all? I don't know tough coin flip. You make it sounds so easy to be broke and unhappy. Does the average American want to put for the bit of effort it takes to make sure this doesn't happen? Or maybe they are frozen by indecision? Great summation paragraph. Getting started is the hardest step.
@The End of the Road Boo Hoo poor you. It's pretty sad you're a college grad with such poor grammar, maybe that's why you can't find a job.
You're doing it wrong if you can't strike a balance between living for today and saving for tomorrow. It isn't an all or nothing proposition.