retirement income, bankruptcy, managing debt, financial advice

Five ways retirees run out of money

And how to avoid them

The most common and greatest fear in retirement is running out of money. Of course most people don’t. Unlike many nations, Australia has a regularly indexed safety net which allows most retirees to at least cover the basics.

For some, however, depending entirely upon the Age Pension is their personal version of running out. However we view it,  most of us would like some financial wherewithal in our later years, with the ability to afford small treats and enjoy a productive and connected retirement.

Staring down our greatest fears is often the best way to deal with them. Today we consider five ways retirees run out of money and how they might be avoided or managed.

1. Overspending

This is obvious, but then again maybe it’s not? If you spend at a riotous rate, but are far from wealthy, you’re generally aware that the day of reckoning will soon approach. But not everyone throws parties like the ‘Great Gatsby’. Some retirees might be scrimping and saving, but still unable to make ends meet. Our spending habits are very personal, but in an ideal world, our outgoings are well covered by our income. Projecting income needs forward before you retire is the greatest service you can do yourself. Even if you feel you can’t live on what your savings and entitlements could provide, knowing this as early as possible is a massive first step. Then working systematically on creating a budget, maximising all your entitlements and getting ever closer to the target of living within your income will be your goal.

Want to learn more about Retirement forecasts?

2. Family disruptions and other unexpected adversity

This doesn’t just refer to the Big ‘D’ for divorce; there are many other family issues and unforeseen events that can have a negative impact on our retirement lives, and not all are about couples. Families can be our greatest source of strength, but sometimes they can be a great source of financial stress. Divorce or separation, of course, usually entails a financial separation and this can be even tougher in retirement as there is less time and lower earnings, usually, to try to make up lost ground. Two may not live quite as cheaply as one, but a jointly owned home is often more financially viable than two halves of a couple separately trying to buy back in to the property market. Ditto with covering short or longer term rental costs for two singles. 

You might also be like the many Australians that have experienced an extreme weather event that has thrown your finances and retirement planning into disarray. Perhaps the most useful feedback here is that others have trod this road before and what seems overwhelming at the outset often becomes manageable and even doable. Seeking emotional and financial advice is usually your best plan. It’s also worth remembering that both the federal and state governments have many free resources that you can access in times of need.

3. Missing out on entitlements

Many of us miss out on benefits we are entitled to receive.  Common examples include:

  • Applying for the Age Pension late.  Centrelink don’t backdate your payments in this situation so you have missed out on that money. You can check here if you are eligible.
  • Not getting  a discount card.  This could be the Pension Concession Card, the Commonwealth Seniors Health Card or State based Seniors Cards.  All of these cards come with some form of savings and if you don’t have them you are spending more than you need to.   In addition many of the recent stimulus payments have been paid automatically to recipients of many Commonwealth discount cards
  • Not accessing rebates.  Most states have some form of energy rebate but you often need to apply to receive it.
  • Making mistakes on your Age Pension application such as overvaluing personal assets

4. Unmanageable debt

This is generally not something that falls on your head from out of the blue although in the current environment of rising interest rates many people that thought they were ok are now really struggling . Having a strong understanding of the current value of your assets compared with the level of your debt will allow you to know your ‘asset to debt’ ratio. It’s important to not just know this, but to check with a trusted adviser or accountant, if your ratio is becoming unmanageable. Or maybe you know this already because you are continually stressed by debt repayments? Should you have reached this stage, there are many supports and resources you can access. Start with your lender, with financial counselling support, the Australian Banking Association or perhaps a broker. If you recognise the situation early enough you may be able to put in place a manageable scheme of repayment. Or you may need to consider an asset sale in order to slay the beast of debt. Whatever solution is best for you, recognising you are in a debt trap is always going to be your first step towards managing it.

5. Not knowing the rules or poor decisions

These reasons for running down retirement savings are actually quite separate. We can all be ignorant of rules that might have an impact on our financial welfare. Losing money because we were ignorant of something we were expected to know is frustrating and debilitating. How to avoid this situation? It’s smart to access qualified and trusted support if you are making major decisions – those involving thousands of dollars or your super savings, for instance. This won’t make you immune from making mistakes, but it will mean you can test your plans and strategies and learn about tax, Centrelink, or legal implications before you make a move. Separately, you will always benefit from being an informed consumer. Each and every day retirees consume financial products such as annuities, income stream products, share investments or term deposits. Keeping up with the rules on these aspects of your income is really important. It helps you ask intelligent questions and reduce the risk of making a poor decision. 

Speaking of which, not all poor decisions are due to ignorance. Some are made in haste, some from pride that we know more than we do, and some because we believe too much in something that actually may be a little ‘too good to be true’. And then there’s the growing danger of falling victim to a scam. Again, it’s a case of ‘buyer beware’ – the more you educate yourself against such pitfalls, the less likely you’ll be caught out.

Helpful resources:

Retirement Essentials also offers tailored advice consultations during which you can share your concerns and needs and learn more about solutions for:

What’s your take on running out of money in retirement? Is this something that bothers you? Do you agree with our list of five ways retirees run out of money? Or have we missed some?