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

    Rolls of hundred dollar bills on a yellow background.

    Some wealthier millennials and Gen Z are saving too much for retirement.Getty Images

    • Nearly half of Americans who retire at age 65 are at risk of running out of money, according to research from Morningstar.

    • Single women have a 55% chance of losing their financial resources, which is higher than single men and couples.

    • Experts advise better tax planning and diversified investments to limit risks during your retirement.

    If you're planning to retire at the normal age of 65, brace yourself, because you're going to want to hear this story.

    About 45% of Americans who leave the labor force at age 65 are at risk of running out of money in retirement, according to a simulated model that takes into account things like changes in health care, nursing home costs and demographics.

    The model, conducted by Morningstar's Center for Retirement and Policy Studies, found that the risk is higher for single women, who are 55% likely to run out of money, compared with 40% for single men and 41% for couples.

    The group most likely to find themselves in this situation are those who haven’t saved for a retirement plan, said Spencer Look, the center’s deputy director. Yet 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 set up income streams for their retirement years. What may surprise many is that one of the biggest mistakes people make isn’t so much about how much they save, but about how they plan around what they save.

    To be more specific, Roop says what surprises retirees is taxes and the lack of planning around them. Many assume that they will move into a lower tax bracket once they stop receiving a salary. But his experience shows that retirees often remain in the same tax bracket or can even move into a higher bracket.

    “It's wrong on so many levels,” Roop said. After retirement, most people's spending stays the same or increases. When you have more free time, more money goes to entertainment and travel, especially in the first few years of retirement. The result is a higher withdrawal rate, which can push you into a higher tax bracket, he noted.

    People invest their entire careers in a 401(k) or an IRA because they allow for 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 lets earnings grow tax-free. That way, during a year when you need to withdraw a larger amount, you can turn to that account instead, he noted.

    Another big mistake people make is: moving money in an inefficient way causing them to pay more tax than they should or lose out on future returns. This may mean they choose to withdraw a large amount from an investment account to pay off a mortgage or buy a house.

    “The IRS has made rules for us, and they are there to pay the government, not you,” Roop said.

    A good example of a major tax mistake that one of Roop's clients (let's call him Bob) recently made was liquidating part of an IRA to buy a house.

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

    “When he told us this, my jaw 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 were going to roll over your IRA and put it in a tax-free account.”

    In this case, Roop planned to move money from Bob’s IRA into an annuity that would give him a 10% bonus, or $15,000. The mistake could have 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 sequence riskThat is, you withdraw money from your portfolio when the stock market falls.

    “The S&P 500 has returned an average of almost 10% over the last 50 years,” Roop said. “And so it's a real assumption that it's probably going to return between 9% and 11% over the next 50 years. But as people retire, we don't know what the returns are going to be.”

    Simply put, if you retire next year with a million-dollar investment portfolio and the market drops 15 percent that year, you now have $850,000. If you have to withdraw money during that time, it will be very difficult to break even, Roop said.

    That means owning stocks and bonds isn’t enough diversification. He noted that you also need to have something that’s protected by capital, like a CD, fixed annuities or government bonds. That way, you can avoid touching your portfolio during a bad time in the market.

    Gil Baumgarten, founder and CEO of Segment Wealth Management, says another major reason he sees people running out of money is lack of appropriate risk appetite that they earn during their income-generating years.

    One low-risk approach is to earn interest on cash, a terrible form of compounding because it’s taxed higher than ordinary income with lower returns, he noted. Meanwhile, stocks can yield higher returns and aren’t taxed until they’re sold, or not at all if you opt for a Roth IRA.

    “People don't take into account how expensive things are going to be over time, and they don't realize they have 40 years left to retire. You don't get rich investing your money at 5%,” Baumgarten said.

    As for those who do take risks, it's often the wrong kind. They chase hype and bet on highly speculative investments. They end up losing money and assume risk is bad, Baumgarten said. The right kind of risk is higher exposure to stocks through mutual funds or index funds and even buying blue-chip stocks, he noted.

    Read the original article on Business Insider