Tips on How Not to Run Out of Money in Retirement

If you’ve ever wondered whether you’ll have enough money to enjoy retirement, you’re not alone; according to a recent SeniorLiving.org study, this is in fact the biggest fear for nearly one in two older adults (ages 55+). Furthermore, one in four fear they’ll never pay off their existing debt.

While it may feel impossible at times to improve your financial situation, the truth is that you can. This post outlines several steps you can take to minimize (or even avoid!) financial roadblocks in your later years. Let’s explore a few such options…

Pinpoint how much money you’ll need in retirement

The most obvious thing you can do is plan for your future in advance. Admittedly, this isn’t very illuminating; but when you consider that most Americans (56%, per Northwestern Mutual data) don’t know how much money they’ll need for retirement, we’d be remiss not to mention it.

While the amount you’ll need is based on various factors—including where you live, your lifestyle, and the health of yourself and your loved ones—know that retiree households spend, on average, $57,818 every year (more than 35% of which goes towards housing expenses), according to the U.S. Bureau of Labor Statistics.

While this number provides at least a baseline with respect to the annual income you’ll likely need, it will only increase as time marches on. For example, in 2016, average retiree household spending was $45,756 (or roughly $3,800 a month); the further away you are from retirement, the higher the threshold in this respect.

To calculate how much money you’ll need for your situation, you’ll first want to develop a vision for retirement. More specifically, reflect on when and where you want to retire and how you’ll fill up your newfound free time. Although you need to consider several other variables as well (and your plans will likely change over time), this will at least provide a solid picture of what your living expenses will look like during retirement.

From there, evaluate where you are now and make any necessary changes—particularly if a gap exists between your current situation and future aspirations.

Reduce downside risk with your investments

Generally speaking, your investing strategy should grow more conservative when you turn 60. This means investing less in stocks, which are often very volatile; if there’s a significant (and prolonged) dip in the stock market, you may lack the luxury of awaiting a market bounce-back to recoup your money. Consequently, your financial stability would face a severe risk during retirement as you may not be able to withdraw money at the same rate you had planned to.

While everyone’s situation is different, the general rule of thumb is to subtract your age from 100 (110, as a more conservative option) when allocating your investment options. The resulting number should reflect the percentage of stocks in your portfolio, with the remaining investments comprised of bonds and CDs.

Become fluent in RMDs

The closer you are to retirement, the more you’ll hear about required minimum distributions (RMDs): the minimum amount of money you’re required to withdraw from specific tax-deferred retirement accounts beginning at age 73 (climbing to age 75 in 2033, for those turning 74 after December 31, 2032).

RMD rules apply to all employer-sponsored retirement plans including 401(k), 403(b), profit-sharing, and 457(b) plans. The mandate also applies to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, as well as to Roth IRA beneficiaries.

Assuming contributions you made into these accounts were tax-deductible, your required minimum distributions are taxed as ordinary income (per the same rate as your taxed wages, interest income, and short-term capital gains) in the year you take them. Consequently, those unfamiliar with RMDs may end up with less money during retirement than their savvier peers. Click here to read about strategies investors can take to minimize or even eliminate RMDs altogether.

Have a long-term care plan

The U.S. Department of Health and Human Services claims that someone celebrating a 65th birthday today has an almost-70% chance of needing some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men. An estimated 20% of today’s 65 year olds will require care longer than 5 years, and despite what you may assume, Medicare and other public programs cover long-term care only in very limited circumstances. It’s therefore crucial to plan for such expenses.

To aid your planning, know that long-term care (LTC) is defined as help you may need with “activities of daily living” (or ADLs) due to injury, health, or cognitive impairment resulting from conditions such as dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed).

Your options for addressing long-term care expenses include self-funding long-term care, purchasing a stand-alone policy, or adding an LTC rider to your life insurance policy.

Consider a health savings account (HSA)

An HSA is a type of savings account you can use to pay for qualified out-of-pocket healthcare expenses, including deductibles and copays. Eligible expenses include anything from Medicare premiums and long-term care costs to dental and vision expenses for yourself, your spouse, and eligible dependents.

Health savings accounts are generally triple-tax advantaged in that you can make pre-tax contributions (or claim tax deductions if you make after-tax contributions), the amount in the account can grow tax-free (other than in California, New Hampshire, New Jersey, and Tennessee), and you can use the money to cover qualified expenses in the absence of taxes.

You also don’t need to spend your HSA account balance every year; any leftover money automatically rolls over to the next one. In fact, your HSA funds will continue to do this on an annual basis and remain in your account indefinitely until used. When you consider that retiree households currently spend an average of $7,540 a year on healthcare expenses (per the U.S. Bureau of Labor Statistics), it’s easy to see why this feature helps make HSAs so appealing.

Not everyone can open an HSA, though, as you must meet specific qualification requirements (e.g., you must be at least 18 years of age and maintain a high-deductible health plan as your only insurance). Click here to review all HSA qualification requirements on the IRS website.

Make catch-up contributions

If you’re age 50 or older but didn’t save enough money for retirement when you were younger, you’ll be happy to know the IRS established rules to help make up for this shortfall via “catch-up contributions”: additional contributions you can make to your 401(k) and IRA accounts above standard limits. For 2024, these limits are an additional $7,500 per year for your 401(k) and $1,000 for your IRA: or a total of $8,500 if you have both accounts.

If it makes sense in your overall plan, you should take advantage of these benefits—because even if you save an extra $3,000 a year ($250 a month) for 15 years and average a 4% return, you’d accumulate more than $61,000 in additional savings for retirement.

Don’t overspend

For most of your life, you’ve spent money based on the amount of income you’ve earned. However, retirement calls for a (often difficult) psychological adjustment because you’ll now spend based on your savings and overall level of comfort. You can take several traditional approaches here.

One such strategy is the 4% Rule, which states you should withdraw no more than 4% of your investment assets in the first year of retirement. Then, in subsequent years, you can adjust your withdrawals for inflation on an annual basis: either by taking a 2% increase every year (the Federal Reserve’s target inflation rate) or adjusting withdrawals based on actual inflation rates. In theory, this rule should allow your investments to grow enough so that you won’t deplete your funds too quickly over a 30-year retirement period.

Another option is to buy an annuity, an insurance product that provides a future guaranteed stream of income for the rest of your life in exchange for a lump sum (or series of payments). Annuities are sometimes a good option for conservative investors who are concerned they’ll run out of money in retirement; these types of products come with many risks, however, and are therefore not for everyone.

No matter which approach you ultimately take—many more exist beyond what’s covered here—know that it’s imperative to develop a cash-flow strategy based on your own specific situation.

In sum: how to ensure you won’t run out of money in retirement

According to the CDC, life expectancy rates will likely increase over time. While this is certainly good news, it also means you’ll need to save even more for retirement. For many, this insight breeds additional fears about running out of money later in life—and is just another reason why we recommend working with a financial advisor as early as possible so you can quell your concerns and make the most of your golden years.

———

Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business. 

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 1⁄2 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.  Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.  All guarantees are based on the claims paying ability of the issuing insurance company. This information is not intended as authoritative guidance or tax advice. You should consult your tax advisor for guidance on your specific situation.