The Surprising Reasons 40% Of People Run Out of Money in Retirement

According to a 2024 simulation by Morningstar's Center for Retirement & Policy Studies, which factors in health changes, longevity, and long-term care costs, about 45% of Americans who retire at age 65 are projected to run out of money during retirement.

For some people, that worst-case scenario could come true, particularly with groups who are at higher risk, including women, Black and Hispanic retirees, and single people.

However, you can (and should) check up on your retirement readiness to avoid these pitfalls that lead retirees to run out of money.

Here are simple but often overlooked reasons why so many people run out of money in retirement.

Medical care is expensive, and those costs will only continue to rise as you get older. The average retired couple may spend $300,000 in after-tax health care costs in retirement, according to Fidelity Investments.

Budgeting for these expenses, choosing the right insurance plan, and taking advantage of Medicare can all help lessen the burden.

When you're on a fixed income and living off investments, it's important to know where every dollar is going to avoid running out of money.

You'll need a clear sense of your monthly income, your fixed expenses, and where you can cut your budget if needed.

Remember, it's always possible to get a part-time job in retirement to make up for the shortfall. Plus, you might find a second act rewarding.

Inflation can hit harder when you're on a fixed income and you can't predict what the inflation rate will be between when you retire and the rest of your life.

Saving as much as possible will, of course, help, but so will waiting to take Social Security benefits. The longer you can wait, the more money you will receive each month. 

And there is usually a cost-of-living adjustment to Social Security each year to mitigate inflation's impact.

First and foremost, saving enough is the most important thing you can do. If the money isn't there at retirement, one of the few options is to find a way to bring in extra cash.

Create a plan early, save aggressively, invest wisely, and consider your future self whenever you make big financial decisions today.

There is a time for an aggressive portfolio allocation, and there's a time to be more conservative.

As you get older, you'll want to lean toward the conservative allocation to protect yourself from dramatic market fluctuations. Before you retire, know how much you can comfortably withdraw from your savings each year so you can make your savings last.

Generally, the 4% rule is a gold standard for how much you can comfortably take out of your retirement accounts each year.

Withdrawing more than this could get you into trouble down the road. Ideally, you'll want to come in even lower, if possible.

Retirement life looks different than your working days. Back when you had a larger income, buying new clothes or dining out might have been part of your lifestyle.

But when you're on a fixed income, you might need to adjust your expectations. Consider inexpensive ways to enjoy yourself, such as book clubs, volunteer groups, and other low-cost ways to spend time with family and friends.

Not all of your retirement accounts were created with after-tax dollars, and Uncle Sam wants a piece of your withdrawals.

Withdrawals from traditional 401(k) plans and IRAs are considered income, and you will be taxed accordingly. But you won't pay capital gains taxes on that money.

If you saved in a Roth IRA, you've already paid taxes on the contributions, so you won't pay again on withdrawals. If possible, convert your traditional IRA to a Roth IRA for tax-free retirement savings.

As you get older, you may realize you don't need as much stuff and that's a good thing.

Spending on clothes, gadgets, and more will quickly eat into your retirement savings, leaving you with less for the things you get the most value from, like spending time with friends and family.

When you contribute to an employer-sponsored 401(k), you generally won't have many choices for where the money is invested. And it might be in a fund that charges, say, a 2.5% fee to manage your money.

While 2.5% doesn't seem like much, over 30 years on a $100,000 account, you would pay nearly $40,000.

After you retire, you can roll over the money into less-expensive mutual funds, such as an index fund, and save yourself some money each year.

If you start your Social Security benefits at age 62, the earliest you can claim them, you'll face a 30% reduction in the amount that you'll receive throughout your lifetime.

Unless you absolutely need to retire at 62 or start claiming Social Security at that point, it's worth waiting until you can take the maximum benefit at age 70.

Employees used to count on the cushion of a pension when they looked toward their golden years. 

But in recent decades, employers have shifted toward 401(k) plans. This means employees are responsible for taking advantage of those accounts and are dependent on market performance for their retirement.

One way to create something like a pension is to invest in annuities. There are several types of annuities, and many have fees and penalties. Be sure to do your homework if you decide to invest in an annuity.

In most cases when you retire, your children are adults and are not on a fixed income. Yet it's sometimes hard to say no when they, or the grandchildren, ask for financial help.

But, keep in mind, your highest earning days are likely behind you and theirs are still ahead of them. There's a time for the tide to shift on who's taking care of whom.

You have all the free time in the world now that you're retired. You can finally step up your travel game or buy the vacation house you've always dreamed of. Of course, you can afford these expenses if they're part of your retirement planning.

Major splurges can quickly whittle down your retirement investments. If a second home or extensive travel are on your wish list, make sure you've allocated that money before you withdraw it from your accounts.

This is a valid concern, particularly as we're lucky enough to have access to better health care and longer life expectancies. While living to 100 may be a goal, that means you have to take steps now to account for 30, maybe 40, years of retirement.

There are many calculators online that will help you determine how long your retirement savings will last and whether or not you need to think of ways to boost your bank account. 

You'll need to know how much you have saved currently, how much Social Security payments you'll receive, and how many years you think you will live.

As you look at your retirement accounts and decide whether you're ready to stop working full-time, make sure you've accounted for both the expected and the unexpected. 

Retirees get into trouble when they haven't properly prepared for decades of potential expenses or spend money too quickly, thinking their best years are finally here. It's worth taking the time to prepare financially.

This can and should be a time to enjoy yourself, and proper planning can ensure it's also a stress-free, comfortable chapter of your life.