How to Protect Yourself From Financial Ruin in Retirement

Most of us work decades to create a sufficient nest egg to fund retirement. But after you bid farewell to the 9-to-5 grind, it's important to manage that money carefully to avoid a crippling financial disaster during your golden years. This effort includes everything from avoiding risky financial moves to keeping on top of your cash flow, and preparing for life's unexpected emergencies. We asked financial experts across the country to weigh in on the best ways to avoid financial ruin during retirement.

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It's hard to know just how much money you'll need to survive in retirement if you don't know what you want your retirement to include. "For instance, do you want to travel in retirement? Or would you rather stay home and live simply and quietly?" asks Deacon Hayes, a financial expert and founder of Well Kept Wallet. "Each of these scenarios requires very different income levels." Hayes suggests sitting down with your spouse or partner and figuring out how you want to live in retirement. "Then you can more accurately plan so that you'll have the income to live the way you want," he said. 

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Lay the groundwork for a financially secure retirement by minimizing as many of your ongoing expenses as possible ahead of time. "The main way you do this is by being completely out of debt by the time you retire," says Paul Moyer, founder of SavingFreak. "If you don't have a house payment, car payment, or any other debt payments, the cost of living is very low."

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Another important step to secure your financial footing after leaving the workforce is conducting a thorough self-audit, says Logan Abbott, president of Wirefly, an online comparison site that helps people save money on monthly services. It includes reviewing credit card balances, the cost of monthly services such as cable and phone fees, and subscriptions billed to your credit cards on a recurring basis. Go over every expenditure, and find ways to spend less in each area. 

Maintaining a detailed understanding of your monthly cash flow (what's coming in and what's going out) is critical to avoiding financial disaster. "We don't realize how much we are spending until we take this step," says Steve Adcock, creator of ThinkSaveRetire, who retired at 33. "Using this knowledge, we can instantly make more informed decisions about where our money is going and how our cash flow is affecting our retirement." There are plenty of online tools for cash flow tracking, like Mint. 

It may sound boring, but budgeting is the No. 1 way to get a realistic picture of what you have and where you want your money, so you.spend smartly and avoid financial problems. "The starting point should be your goals — whether they're trips you want to take, a college education for a grandchild or something else, write all the goals down, and then build your budget with the goals in mind," says consumer finance and debt expert Tanya Peterson, vice president of brand at Freedom Debt Relief.  

An emergency fund with enough money to cover a minimum of six months' expenses will help save you when curveballs and surprise expenses inevitably crop up in post-retirement life. "I always recommend at least six months, but a year of living expenses in an easily accessible account, like an interest-bearing savings account, is even better," Adcock says. "Though we won't need to worry about losing a job during retirement, we do need to think about those expenses that have a statistically higher likelihood of happening later in life, like health care and divorce." 

Relying on a single income source is among the most frequent reasons people go broke in retirement. Many people rely on Social Security as their primary source of income, for instance, which is not likely to be enough to cover all expenses comfortably during retirement. Diversifying income is a safer bet and could involve relying on some combination of a pension, 401(k), IRAs, or annuities.  

As you develop estimates of how much money will be required to fund retirement, don't overlook taxes you might need to pay on distributions. "A $1 million nest egg will only last a decade or so if you take a $100,000 distribution annually so that you can live on approximately $75,000 a year," says financial educator Jennifer Harter, of Jennifer Harter Consulting. While her example pertains to the New York state tax rate, the point applies across the country. Distributions from a 401(k), 457s, 403(b), traditional IRA, Simple IRA, and SEP IRA will all be taxed at the individual's tax rate at the time of the distribution.

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Credit scores may not be the first thing on your mind when approaching retirement, but a solid credit score will be important for numerous reasons. "Credit scores can still impact numerous areas of a retiree's life, such as auto loan approvals, credit card approvals, insurance premiums, and your ability to refinance a mortgage if rates drop," says Oliver Browne, a credit industry analyst. "If a retiree found themselves in a situation where they needed to borrow money due to an emergency or otherwise, having poor credit scores could lead toward financial ruin." Subpar credit scores might result in significantly higher loan interest rates or can prevent someone from accessing a loan altogether. 

People are living longer than they did decades ago — even after the impact of the coronavirus pandemic, the average life expectancy in the United States is now 76 years, according to the Centers for Disease Control and Prevention. Such longevity has affected the retirement preparedness of countless Americans. CPA Logan Allec, owner of Money Done Right, suggests that to avoid financial ruin, people need to save more money than they think they'll need or use. "Do expect to live longer and plan to have enough money for a longer life," Allec says. "Save enough to live to 100, not just 90." 

Income annuities are designed to protect you from financial ruin if you live to a very old age by providing a guaranteed lifetime income. "The longevity annuity, also called a deferred income annuity, combines tax-deferral with a future stream of income. It defers payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older," says Ken Nuss, CEO of AnnuityAdvantage, an online annuity marketplace. Options include single-life annuities and joint-life annuities, which typically cover both spouses.  

When a person is within five years of retirement, they should begin to reduce their risk exposure in retirement accounts. "A large downturn in the market immediately preceding retirement can have devastating effects on an individual's standard of living in retirement," says Robert Johnson, professor of finance at Creighton University's Heider College of Business. "The five years prior to retirement can be considered the retirement red zone … the retirement investor can't afford a big downturn in the retirement red zone." Johnson suggests reducing the percentage of investments in stocks during this time and shifting that money into bonds. 

Racking up significant health care costs during retirement can be devastating. "Eat a healthy diet, get required rest, and eliminate unhealthy physical habits, like smoking and drinking. Get the right amount of exercise, too," says David Bakke, a Money Crashers contributor.  

High medical bills are the No. 1 cause of personal bankruptcy in the United States, says Michael Stahl, executive vice president of HealthMarkets, an independent health insurance agency. Ensuring you have the proper insurance coverage is one way to help alleviate such steep costs and financial disaster. "It's especially important to have an understanding of what Medicare does or does not cover and determine if there may be gaps in your insurance you should consider filling to avoid paying out of pocket for medical issues."

Do you have enough assets to cover long-term care, or do you need to buy long-term care insurance? The truth is, most people spend only one to four years in long-term care, making self-funding an option for some, says Michelle Brownstein, a certified financial planner. AARP provides a long-term care calculator that can be a good place to start. "When you calculate this, try entering the average cost of long-term care in your area as an expense for up to four years," Brownstein says. "The results will give you an idea whether you can self-insure or should purchase protection."

If you have family members or relatives who rely on you in any way financially, it may be a good idea to consider ending those agreements as you prepare for retirement, unless you're entirely certain you can continue to meet them. "Remember, when you retire, you have your money and your money alone, rarely anything else," Bakke says.

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A good adviser will advocate for your best interests and protect you from your own emotional reactions to the financial changes that will come during retirement, whether those changes are in the market or in your own family life and income stream. "A trusted adviser should talk with you about all the options to protect and to grow your savings; market investments, annuities, life insurance with long-term care protection built in," says Todd Murphy, a facilitator at Yale School of Management and finance expert at Prime Financial Services. "An adviser who doesn't review and educate you on all the options is a salesperson, not an adviser."

As homes and our bodies get older, large expenses pop up. "The deductibles and co-insurances on health insurance can be substantial, as can the joys of homeownership expenses," says Amy Merrill, wealth manager at Creative Planning. She suggests setting a fixed amount in your large expenses account, perhaps $12,000 to $15,000, and replenishing it when it the balance decreases.

Joseph Polakovic, owner and CEO of Castle West Financial, suggests dividing retirement funds into two distribution categories — lifestyle spending and discretionary spending — to balance money wisely for the long term. "Lifestyle spending is the amount that's needed from your assets each month in order to pay your bills, buy food, and essentially live your day-to-day life," he says. "The portion of your investments designated in this way should be invested with a conservative approach and have a conservative distribution strategy attached to it. Fixed indexed annuities or dividend stocks are usually recommendations for this part."

The remainder of your liquid assets, money that's not needed for lifestyle spending, can be earmarked for discretionary spending. "This can be individualized to traveling, home improvement, or whatever else you may want to spend on, but don't necessarily need to," Polakovic says. "This does not include emergency funds and can be more aggressively invested." Distribution from this account should follow basic tactics of buy low and sell high and tailor your discretionary spending habits to the performance of this account.

"I believe one of the biggest roads to financial ruin is being too conservative," Polakovic says. "Often, I see clients averaging a lower return than inflation and therefore they are essentially losing purchasing power and will need to dip further and further into their investments as time passes." By dividing investments between lifestyle spending and discretionary spending, it's possible to protect yourself from market volatility while increasing wealth and discretionary spending. 

To be fully prepared for retirement, find out how much money you can expect to get from Social Security. You can view your latest Social Security statement at ssa.gov. "It's a good idea to review it from time to time to make sure there aren't any errors," Brownstein says. "Your Social Security benefits are primarily based on your highest earnings over 35 years and your age when you file for benefits. Review your statement and check your earnings history. Let the Social Security Administration know right away if you find an error because your benefits will be based on their record of your lifetime earnings."

Conduct a retirement test run. "I think it's critically important for people to 'practice' living on what they perceive their retirement income needs to be for one year prior to retirement," Merrill says. "That way, they can figure out for themselves if their figure is doable. If it's not — many times the perceived income need and the actual can be different — then they could work longer, save more, or adjust their spending habits if the retirement date is in stone."

Retirement may be different from what you expect. You might think you want to retire to the country, then find yourself missing the culture of the city. "Or you might think you want to stay in your home and then decide to move nearer to your children and grandchildren," Brownstein says. "It's okay to change your mind, if you have a solid retirement plan in place."

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