How to Go Broke in Retirement

Steve Merrell |

If you are getting ready to retire, I have some news for you: retiring can be stressful. In fact, with a score of 45, retiring ranks number 10 on the Holmes-Rahe Life Stress Inventory, a well-known tool for measuring the amount of stress in a person’s life. The good news is that retirement isn’t nearly as stressful as the death of a spouse (score of 100), but it is slightly more stressful than getting pregnant (score of 40).

One of the biggest stressors with retirement is the financial uncertainty it often brings. Many retirees wrestle with difficult questions. How much can I afford to spend? What happens if I get sick? Will I outlive my savings? Nobody wants to be old and broke.

An experienced financial planner can help you answer these questions and develop a plan that allows you to retire with confidence. However, even a well-planned retirement can run into trouble if you neglect certain principles during retirement. Here are four mistakes people make that dramatically increase the odds of going broke in retirement.


1. Spending too much, especially early in retirement. Many people think their spending will go down when they retire, but that isn’t always the case. In fact, a recent study conducted by the Employee Benefit Research Institute found that 46 percent of retired households spent more in the first two years of retirement than they did in the year just before retiring.

The problem with overspending is that you lose the compounded returns those funds would have generated if they had stayed invested. With compounding, a dollar earning 7 percent will double every ten year. This means the $10,000 cruise you take on your 65th birthday to celebrate retirement really costs you $20,000 when you are 75 and $40,000 when you are 85. I’m not advocating austerity. If you have enough money and plan for it, spending isn’t a problem. However, overspending is dangerous and can severely undermine your long-term financial security.

2. Bankrolling your kids. This is a serious problem for many older couples and their kids. As a father of five, I understand the desire to help kids get a good start in life. However, few things are more debilitating to a family than having adult children remain dependent on their parents. It’s kind of like that sign I saw at Yellowstone: “Don’t Feed the Bears.” Financial dependence will stunt their growth and become a financial albatross around your neck.

I have a very good friend who literally made a fortune as a bond trader on Wall Street. I once asked him how he helps his kids prepare to inherit his fortune. His answer stunned me. He said, “My wife and I decided a long time ago that we didn’t want to ruin our kids, so we told them they will inherit nothing. We have made sure they received a good education, but after that they are on their own.”

The greatest help you can provide your adult children has little to do with supporting them financially. Give them your time and the benefit of your experience but be careful you don’t compromise your financial security (and theirs) by being overly generous with your money.

3. Abandoning stocks. Inflation is one of the biggest financial risks you will face in your retirement years. Over the years, even small amounts of inflation can add up to a big reduction in your wealth, unless you protect against it. That’s why your portfolio allocation should include stocks. Despite their volatility, stocks are the single best way to beat inflation over time. Your financial planner can help you find the proper asset allocation for your situation and can help you adjust it as your circumstances change.

4. Failing to adapt. A large part of your security in retirement will depend on how well you can adapt to changing circumstances. You can bet on it: the market will blow up from time-to-time and emergencies will arise. In response, you may need to temporarily reduce your spending to keep your plan on track.  After the markets recover and the emergencies resolve themselves, you can return to your normal behavior. Your ability to be flexible will help you stay resilient and secure.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to