4 Middle-Class Retirement Traps That Deplete Your Savings

Planning our retirement together

Did you know that 46% of retirees have no plan if their retirement savings run out? How about that 79% of Americans agree that there is a retirement savings crisis? With prices rising across the board, making your retirement savings last can seem impossible.

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After all, there are dozens of unknown factors, like your life expectancy, the cost of healthcare in 10 years or what the housing situation will look like. Here are four retirement traps that middle-class retirees should avoid.

Trap No. 1: Not Diversifying Your Income Streams

Diversification is the process of choosing investments in different industries, classes and businesses to avoid major portfolio losses. Data by Morningstar shows that a 60/40 portfolio that was diversified sustained a 14% loss during 2022, compared to the 17% loss in an undiversified portfolio.

Let’s say that you generally withdraw 4% of your portfolio each year. Your starting balance was $780,000, meaning you could safely withdraw $31,200 each year. The stock market experienced some turbulence, dropping your portfolio value to $675,000. Following the 4% rule, you can only withdraw $27,000.

This situation causes two main issues. For one, you are withdrawing your funds when they are sustaining losses. Second, you will need to break outside of your traditional 4% withdrawal rate to receive the same income.

Historically, the stock market rebounds strongly after negative returns. In 2022, the market dropped 19.44%. However, in 2023, there was a gain of 24.23%. Diversification relies on having other investments to support your lifestyle during periods when the stock market is down, giving your investments time to recover.

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Trap No. 2: Overreliance on Social Security 

Experts predict that if no legislative changes are made, Social Security will only cover 75% of scheduled benefits starting in 2035. Although some type of preventative measure will most likely be taken to give retirees their full benefits, the middle class should not count on receiving 100% of benefits.

Overreliance on Social Security benefits can derail your retirement plan. The first step to understanding your Social Security benefits is to view your account through the Social Security Administration’s website. This will help you understand if you’ve satisfied your work credit requirements and outline your expected benefits.

Then, only factor a percentage of your benefits into your retirement plan, such as 50%. This gives you leeway when it comes time to retire. If you receive more benefits, great! If not, you’ve already planned for lower benefits and will not have to deplete other savings to make up for the difference.

“Over the years, I’ve seen many clients rely too heavily on Social Security income in retirement,” said John Crist, founder of Prestizia Insurance. “Social Security was never meant to be a retiree’s sole source of income. The average benefit provides only about 40% of a typical retiree’s pre-retirement income. Relying solely on Social Security can leave retirees financially vulnerable.”

Trap No. 3: Living Outside Your Means

Everyone can benefit from a budget. In fact, American Century Investments estimates that 85% of individuals have a budget. Budgets are especially important for retirees who have a set income.

Let’s say that on average, you spent $60,000 per year. During your retirement planning, you used this number to estimate how much money you would need, which is $1,500,000, using the 4% rule. However, you become like the other 63% of retirees who believe travel is an important retirement goal. Your actual spending is $80,000 per year.

You no longer follow the 4% and are depleting your retirement savings faster than planned. Before you retire, you must have an accurate picture of your expected retirement expenses.

“Living beyond your means is easy to do, but the impact on retirement savings can be devastating,” Crist said. “Many middle-class retirees end up spending more in retirement than they budgeted for. Trips, hobbies, dining out and entertainment can significantly deplete savings over time. Creating a comprehensive retirement income plan helps determine how much you can spend each year to ensure your savings last as long as needed. Sticking to that budget is key.”

Trap No. 4: Not Having an Emergency Fund

Emergencies happen. Whether your water heater finally decides to stop working or you have an unexpected medical bill, emergency expenses can add up. A recent LendingTree study found that 49% of Americans can’t afford a $1,000 emergency. Even though you might be retired, an emergency fund is still an important component of your savings.

As a general rule of thumb, you should have three to six months of expenses in your emergency fund. For example, if you spend $3,000 per month, you should set aside between $9,000 and $18,000. When an emergency does occur, you don’t need to worry about pulling additional funds out of your 401(k) or IRA. Using a high-yield savings account can be a great way to earn interest income on funds sitting in your emergency fund.

Are you ready for retirement? Whether you already have your toes in the sand or are getting ready to pack your bags, it’s important to understand these retirement traps. Remember, retirement savings look different for every retiree.

Work with a qualified financial planner, advisor or accountant to craft your fool-proof retirement plan.

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