Being middle class is the primary goal for many people who want just enough to be able to manage life’s expenses and have a little left over to enjoy life.
However, being middle-class doesn’t guarantee continued comfort, especially in retirement. Falling from middle class to lower income is more than possible. And when it does, it not only strains your financial life but also adds stress to every other part of your life.
Knowing why this happens and what to avoid can make planning for when you retire easier. That is why we put together this list of reasons why some middle-class retirees suddenly find themselves living on a low income. By knowing these issues, you can avoid becoming a statistic.
1. Their Lifestyle Exceeds Their Income and Assets
The biggest reason for people slipping down the income classes that I see is due to lifestyle. Many middle-class retirees are excited about retirement and believe it will be this magical experience where they can see or do anything. While it can be with proper budgeting, it isn’t so when you spend with reckless abandon.
Take care to ensure you can afford what you’re doing before you go spending money. Otherwise, you could end up ruining the rest of your retirement rapidly.
2. Unexpected Medical Developments
The American healthcare system is expensive. While Medicare is a helpful resource, it doesn’t cover everything, which can range from dental care to long-term care. An unexpected medical development that isn’t covered by this insurance can be ruinous.
If you want to avoid this, consider supplemental insurance policies to provide more comprehensive coverage. It may cost you more over time, but it will prove useful if you experience an unexpected medical development.
3. Too Little Invested in Retirement Accounts
Did you know that only 54 percent of Americans have retirement accounts? So many Americans lack investments, whether they’re not investing at all or too little. If you fall into the latter category, your retirement accounts probably won’t last you long.
Retirement accounts need to be maxed out (if possible) and contributed to for years ahead of time. Retirees who didn’t take care to invest enough can easily see themselves drop from middle class to lower income.
4. Risky Investments
I know how appealing riskier investments can be. From fine art to collectibles to Bitcoin, watching things skyrocket in price and appeal gives us all FOMO. However, the thing that drives the appeal of these investments is the same thing that can cause them to lose all their value.
There are tons of stories of retirees who have put their life savings into alternative investments only to lose it all. As the age-old advice goes, never invest more than you’re willing or able to lose!
5. Changes in the Economy
Some things are well within your control when it comes to your financial health. Other issues are out of your control entirely.
For example, the health of the economy can play a role in your overall financial health. If the value of your assets drops, purchasing power drops, and you find yourself unable to find work, you can go from middle-class retiree to low-income retiree rapidly. Finding ways to recession-proof your potential income sources and hedge against risk is the best way to prepare for such an issue.
6. Relying on Social Security
I know that Social Security doesn’t pay out too much unless you make a ton of money over your lifetime. That said, I was surprised to learn that retirees only earn about $1,900 per month.
That’s not much to live on. If you have limited assets and go into retirement as middle class, it’s almost guaranteed that you’ll be one of the many poorer retirees with time. The lesson? Never rely on Social Security as your only form of income.
7. Existing Near the Lower End of the Middle Class
Being middle class is not defined as earning a specific amount. Even within the middle class, there exists a spectrum. If you’re on the higher end of that spectrum, you probably aren’t hurting too much for money and may not face many challenges during retirement.
If you’re on the lower end of the spectrum, you could be one major bill away from being considered low-income. Where you stand within the middle class can make it easier for you to slip into low-income status later on.
8. Inflation
Unfortunately, inflation is a nuisance that we all have to deal with. But it’s something that can grow exponentially in a short period of time. I certainly remember prices spiking just a few years ago for most things and not quite falling back down to where they were before.
Inflation is another issue you have no control over that causes some retirees to lose a lot of their money. The best way to hedge against it is to make sure that the interest rate and returns on your various accounts outpace inflation regularly.
9. Being Too Generous to Friends and Family
We all have someone in our family who likes to give out money. If they’re older, they might be doing it because they feel as though they’re helping out and doing something good. But all things have their limits. Some retirees give out too much and don’t have enough money left over for themselves to stay in the middle class.
On a more nefarious note, some are taken advantage of by friends and family and end up slipping for this reason. Knowing your limits and having safety measures in place is the key to preventing this from happening to you.
10. Sudden Job Loss or Business Hardship
Sudden job loss or business hardship can quickly impact the financial status of middle-class retirees. The labor market is always subject to changes, and we saw a massive change in 2024. Around June of this year, there were around 6.8 million people unemployed.
The economy is also always subject to change. If fewer people are getting paid, fewer people may come to you for business. Given that many retirees count on a business or a job to make money for additional income as they navigate retirement, such a loss can put them in the low-income range with ease.
11. Changes to Social Programs
Social programs are taken for granted. The reality of social programs is that they’re entirely in the hands of those who oversee them. If government officials decide to cut or reduce them, middle-class retirees could likely be impacted.
The loss or reduction in Medicare coverage and Social Security benefits would have immense consequences. This is purely hypothetical but is always possible.
12. Ignorance Surrounding Taxes
Taxes often come out of left field for retirees who don’t know enough about their investments or side hustles. The good news is that most retirement accounts and similar investments have tax benefits. The bad news is that pulling funds out too early could have tax consequences.
Speaking of business activity, you still have to pay income taxes and taxes that your employer would otherwise withhold. Failing to know what you need to pay is one reason why some retirees see their funds drained to the point where they’re starting to fall into the lower-income class. It’s never too early to learn about taxes and make sure you know how to navigate them in retirement.
13. Pulling Out Too Much Funding Too Soon
Money in your retirement accounts will be used to live, but you shouldn’t be pulling massive amounts of cash out at once. The same goes for other investments. This reduces the amount you earn over time, leading to substantially fewer resources.
Retirees regret doing this because they have depleted the cash they needed to pull out over time or fall back on in an emergency. Financial planning is crucial to staying in the middle class after retirement!
14. Carrying Too Much Debt or Taking on New Debts
Debt is something that absolutely must be paid off before you retire. There may be some new debts like auto loans, but those won’t likely take too much out of your income. The problem?
Some middle-class retirees will retire with things like student loans, mortgages, personal loans, and even credit card bills from before retirement or due to a spike in spending after retiring. Left unaddressed, these retirees will inevitably face financial hardship and become low-income retirees. Pay off your debt and then avoid it like the plague.
15. Living Longer Than Expected
I try to maximize my lifespan with good nutrition, exercise, and preventative care. But the reality is that we don’t know when exactly we’ll be going. Going too soon is not what any of us want. But going much too late when we haven’t saved up enough cash for it is not desirable either.
Some retirees live much longer than expected, which strains their finances. This can turn a comfortable middle-class retirement into a stressful low-income one. Always save more, even if you joke or anticipate being outlived by your peers.
16. Too Many Major Life Developments at Once
Finally, you may fall victim to a host of issues all at once, as is the case with some middle-class retirees. You could lose your business, develop health problems, and find yourself in the midst of a recession all at the same time.
Life happens, and not all of these developments are positive. Being ready for anything is the key to giving yourself the best chance of staying in the middle class.
