10 Key Signs Your Retirement Nest Egg Won’t Be Enough
Written by
Cameron Huddleston
Edited by
Renee Ross
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After years of hard work, the last thing you want is to enter retirement only to find yourself financially unprepared. Unfortunately, this scenario is more common than many expect. If your vision of a comfortable retirement is starting to look more expensive than you planned, now is the time to reassess and make a financial pivot.
In this article, we’ll explore the key reasons your retirement nest egg might fall short — and the warning signs that you may not be saving enough. More importantly, we’ll share practical steps to help you get back on track and secure the retirement you deserve.
You Underestimated Your Life Expectancy
Your retirement could easily be more expensive than you thought if you live a lot longer than you expected you would. About one in four 65-year-olds today will live to age 90, according to the American Psychological Association.
If you saved enough to cover expenses for 20 years in retirement but end up living for 30 years in retirement, you’ll have to find a way to stretch your savings for another 10 years.
What To Do
To reduce the risk of outliving your savings, you shouldn’t rely on just one source of income in retirement. You should have a portfolio of diversified investments in tax-deferred retirement accounts, such as 401(k)s and Roth IRAs, from which you can withdraw money over time.
Additionally, you should take a balanced approach by having a source of lifetime income, such as an annuity, if you won’t have a pension. The required minimum distribution amount of 4% annually is a good number to stick with to ensure your nest egg lasts long enough.
You Don’t Have a Healthcare Plan
You know you’ll need to pay for healthcare in retirement. But you might not realize how high that expense will be. A study by T. Rowe Price estimated that a 65-year-old couple retiring in 2024 would need $315,000 or more to cover medical expenses in retirement.
Moreover, if you receive care in an assisted living facility or nursing home, you’ll have to shell out big bucks. According to New York Life Insurance, the annual median cost of long-term care is over $116,000, or over $9,600 per month. You could quickly run out of money in retirement if you need long-term care but don’t have a plan in place to pay for it.
What To Do
When calculating how much you need to save for retirement, be sure to figure in healthcare costs, which could be drastically higher than what you’re paying now. When you’re in retirement, compare Medicare options to make sure you get the right plan for your needs.
You can use several strategies to be financially prepared for long-term care. Options include getting a long-term-care insurance policy or a hybrid life insurance policy that will pay out if you have a long-term-care event. Ideally, you should meet with a financial planner who specializes in long-term care planning to help you devise a strategy.
You Didn’t Take Inflation Into Consideration
When you’re working, you might not feel the impact of inflation if your wages are rising along with prices. So, you might forget to factor inflation into your retirement savings calculations. The current inflation rate is around 2.7%, but that doesn’t mean it won’t go up, especially with so much economic uncertainty.
What To Do
If you didn’t factor inflation into your retirement calculations, you might have to save more than previously projected. In addition to saving more to prepare for inflation, consider delaying Social Security benefits. You can maximize your Social Security benefit by waiting to claim it until age 70. Not only will your monthly check be bigger, but the Social Security Administration’s (SSA) cost-of-living adjustment (COLA) — which helps benefits keep up with inflation — will be applied to that bigger payout.
You Didn’t Factor in Big-Ticket Items
One of the things you need to do before you retire is to create a post-retirement budget to estimate your expenses and how much income you’ll need to cover them. However, you might end up spending more than expected in retirement if you don’t factor in big-ticket items, such as a car, home appliances, home renovations or maintenance projects, and so on, into your budget along with your regular expenses.
What To Do
It’s easy to overlook expenses such as a new car or home repairs when creating a retirement budget. Adjust your budget by making a list of big-ticket items you’ll likely need to pay for and an estimate of how much they’ll cost, then build an emergency fund in a savings account that’s big enough to cover those expenses.
You’re Spending More To Stay Busy
Your retirement budget projections might also be off if your spending habits change in retirement. While you may have been a penny pincher before retiring, you could find yourself spending more on entertainment than you used to. For many retirees, shopping and eating out are their way to keep social and stay busy.
What To Do
Look for free and low-cost ways to stay active and connected with others in retirement. You can take walks or hike, research your family’s history or take advantage of free community events. Consider joining book clubs or volunteering in your local community.
You Spend Too Much on Family
You could end up spending a lot more in retirement than expected if you lend or give money to your children. It’s never easy to say no, but if you are going to help them out, you have to do so judiciously. If you’re not careful, you could run out of money.
It’s also easy to fall into the trap of overspending on grandchildren. Grandkids can bring so much joy, but they also can threaten your nest egg if you travel frequently to see them, take them and their parents on vacation, pay for their college tuition or move to be closer to them.
What To Do
Having a solid financial plan will help you understand the risks of raiding your retirement savings to spend on your family. Without this plan, you’ll have trouble establishing boundaries when it comes to requests for money.
This plan should also include what you’re willing to spend on your grandchildren. Make sure your children know what expenses you’re willing — or not willing — to cover. This is especially important when it comes to education costs or living expenses.
You Didn’t Take Taxes into Consideration
While you are busily building your nest egg, you might not realize how big a bite taxes will take out of your retirement income. For example, you’ll have to pay income taxes on withdrawals from a 401(k) or IRA.
So, if you need $50,000 a year to cover expenses, you’ll have to withdraw even more to cover the tax bill. If you don’t consider taxes, you could go through your savings quicker than you expected.
What To Do
A 401(k) is a tax-deferred account, because contributions are made from your paycheck before taxes. The money grows tax-free, but you have to pay taxes on withdrawals at your regular income-tax rate. Withdrawals from a traditional IRA are also subject to income tax.
To reduce the tax bite on your retirement income, consider saving money in a Roth IRA as well. A Roth IRA is a tax-free account, where you deposit money after you’ve paid taxes on it, allowing you to withdraw that money tax-free in retirement. When you cash out your investments, you’ll pay the capital gains tax rate, which is typically lower than the regular income tax rate.
If you have a traditional IRA, consider converting it to a Roth IRA in early retirement for a source of tax-free income.
You Didn’t Consider Fees
Retirement can cost more than expected because if you’re paying high fees on your investments and retirement accounts. Somebody with $100,000 in a retirement account and terms of 2.5% over 30 years would be paying about $40,000 more in fees over that time than if the fees on their account had been just 1.5%.
What To Do
Check your retirement account statements to see what fees are being charged. If the investments you have chosen have high fees, it might be time to switch.
If your retirement account offers low-cost index or target-date funds, consider those. An index fund is a mutual fund that tracks the performance of a major index, such as the S&P 500. A target-date fund reduces the risk in your portfolio by shifting from stocks to bonds as you near retirement.
You Took on New Debt
Ideally, you’ll have paid off all debts — including your mortgage — before you retire. But taking on new debt in retirement by living beyond your means is a recipe for disaster.
What To Do
If you take on new debt in retirement, be sure you are taking proactive steps to pay it down as soon as possible. One option is to refinance a home if lower interest rates are available. Another option is debt consolidation, which can be useful if you have multiple high-interest-rate debts.
You should also try cutting down on spending to have more money to dedicate to paying down debt. Consider taking on a side hustle in retirement to bring in more income that can be used specifically for paying off your debts.
You Withdraw Too Much Money Each Year
Conventional wisdom dictates that you should plan to withdraw 4% from your nest egg each year, but this might actually be too much. The amount you should withdraw will depend on the size of your nest egg and economic circumstances, so don’t just follow a blanket rule and assume your withdrawal amounts will work out.
What To Do
Some studies have found that the ideal withdrawal rate is closer to 2.8%, but again, this will vary based on your individual circumstances. It’s best to meet with a financial professional to come up with a withdrawal strategy that will allow you to live comfortably without having to worry about running out of money in retirement.
Caitlyn Moorhead, Laura Beck, Gabrielle Olya, and Jordan Rosenfeld contributed to the reporting for this article.
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