45% of Americans will run out of money in retirement

If you're planning to retire at the typical age of 65, brace yourself—this is something you’ll want to know.

A new model, which takes into account factors like health changes, nursing home expenses, and demographic shifts, shows that roughly 45% of Americans retiring at 65 are at risk of running out of money during their retirement years.

The simulation, conducted by Morningstar's Center for Retirement and Policy Studies, revealed a higher risk for single women, with a 55% chance of depleting their savings, compared to 40% for single men and 41% for couples.

The most vulnerable group? Those who didn’t save for a retirement plan, according to Spencer Look, the center’s associate director. But even individuals who believe they're well-prepared may not be, according to retirement advisors.

“It’s a significant issue,” says JoePat Roop, president of Belmont Capital Advisors, who helps clients establish retirement income streams. Interestingly, the biggest pitfall people face isn’t necessarily how much they’ve saved—it’s how they plan around what they’ve saved.

Roop points out that one of the most common surprises for retirees is taxes and their lack of planning for them. Many expect to be in a lower tax bracket after they stop working. However, Roop says retirees often find themselves in the same, or even a higher, tax bracket.

"It’s a misconception on so many levels," Roop explains. Most people maintain or even increase their spending after retirement, with more money going toward leisure activities like travel and entertainment, especially in the early years. This increased spending leads to higher withdrawal rates, which can push retirees into a higher tax bracket.

People often spend their working years contributing to tax-deferred accounts like 401(k)s or IRAs, which allow them to defer taxes on those contributions. While this seems like an advantage in the short term, the downside is that withdrawals from these accounts are taxed later on.

Roop’s recommendation? Include a Roth IRA—an after-tax account where your gains grow tax-free. In a year when you need to make larger withdrawals, you can pull from that Roth account, avoiding a tax hit.

Another common error is withdrawing large sums from investment accounts in a way that triggers unnecessary taxes or reduces future returns. This often happens when retirees withdraw significant amounts to pay off a mortgage or purchase a home.