About 45% of Americans will run out of money in retirement, including those who have invested and diversified. Here are the 4 biggest mistakes that are made.

• Nearly half of Americans retiring at 65 are at risk of running out of money, Morningstar finds.

• Single women have a 55% chance of having their assets depleted, which is higher than single men and couples.

• Experts recommend better tax planning and diversified investments to reduce pension risks.

If you want to retire at the standard age of 65, buckle up, because this is what you’re going to want to hear.

About 45% of Americans who leave the workforce at age 65 are likely to run out of money in retirement, according to a simulated model that takes into account factors such as changes in health status, nursing home costs and demographics.

The model, conducted by the Morningstar Center for Retirement and Policy Studies, showed that the risk is higher for single women: they are 55% likely to run out of money, 40% for single men and 41% for couples.

According to Spencer Look, the center’s deputy director, the group most vulnerable to ending up in this situation are those who haven’t saved for retirement. Still, retirement advisers say even those who think they’re prepared aren’t.

“It’s a big problem,” says JoePat Roop, president of Belmont Capital Advisors, who helps clients build income streams for their retirement years. What may surprise many is that one of the biggest mistakes people make isn’t so much how much they save, but how they plan what they save.

More specifically, Roop says what surprises retirees: Taxes and lack of planning. Many assume that if they stop receiving a paycheck, they will end up in a lower tax bracket. However, in his experience, retirees often remain in the same tax bracket or could even end up in a higher tax bracket.

“It’s wrong in many ways,” Roop said. After retirement, most people’s spending habits either stay the same or increase. When you have more free time, more money goes toward entertainment and travel, especially in the first few years after retirement. The result is a higher payout rate, which can push you into a higher tax bracket, he noted.

People spend their careers investing in a 401(k) or an IRA because they allow pre-tax contributions. It sounds like a great benefit if you can reduce and defer your taxes. The downside is that withdrawals are taxed.

His solution is to add a Roth IRA, an after-tax account that allows earnings to grow tax-free. “That way, in a year when you need to withdraw a larger amount, you can tap into that account instead,” he noted.

Another big mistake people make is Moving money in an inefficient way This results in them paying more taxes than they should or losing out on future earnings. This may include deciding to withdraw a large amount of money from an investment account to pay off a mortgage or buy a home.

“There are rules that the IRS has put in place for us, and they are designed to pay the government, not you,” Roop said.

A prime example of a major tax mistake one of Roop’s clients (let’s call him Bob) recently made was liquidating part of an IRA to buy a home.

“Bob is a man of modest means who is retiring this year,” Roop said. But a sudden breakup with his girlfriend led to him cashing out part of his IRA to buy a house. He decided to withhold the tax, which could have been between $30,000 and $40,000.

“When he told us that, my mouth dropped,” Roop said. “I said, Bob, you had the money for the down payment in another account that wouldn’t have been taxed, and we wanted to roll over your IRA and put it into a tax-advantaged account.”

In this case, Roop planned to convert money from Bob’s IRA into an annuity that would have paid him a 10% bonus, or $15,000. The mistake could cost Bob between $45,000 and $55,000, between the taxes owed and the missed bonus.

The lesson: Don’t be Bob.

The next big mistake is Sequential riskThis means you withdraw from your portfolio when the stock market is down.

“The S&P 500 has averaged almost 10% over the last 50 years,” Roop said. “So it’s a reasonable assumption that it’s probably going to be between nine and 11 percent over the next 50 years. But when people retire, we don’t know what the returns will be.”

Simply put, if you retire next year with a million dollar investment portfolio and the market falls 15% this year, you will now have $850,000. If you have to pull back during this time, it will be very difficult to break even again, Roop said.

This means that owning stocks and bonds does not provide sufficient diversification. He pointed out that you also need to have something that is protected by principal protection, such as a CD, fixed annuity or a Treasury bond. This way you can avoid touching your portfolio during a bad market period.

Gil Baumgarten, founder and CEO of Segment Wealth Management, says another big reason he sees people running out of money is that Lack of appropriate risk taking They earn during their earning years.

A low-risk approach is to earn interest on cash, a terrible form of compounding because it is taxed more highly than lower-yielding ordinary income, he noted. Meanwhile, stocks can provide higher returns and are not taxed until you sell them, or are not taxed at all if you choose a Roth IRA.

“People don’t take into account how expensive things become over time and don’t realize that they can live another 40 years in retirement. You can’t get rich investing your money at 5%,” Baumgarten said.

And those who take risks are often the wrong ones. They chase the hype and rely on highly speculative investments. They end up losing money and assume the risk is bad, Baumgarten said. The right kind of risk is greater exposure to stocks through mutual funds or index funds and even buying blue-chip stocks, he pointed out.

Read the original article on Business Insider