One of the most common questions I get asked by people looking to retire is, "How do I ensure I won't run out of money in retirement?" If you've asked this question, you have reasons to be concerned: Healthcare is costly, most people are living longer and inflation has been eroding purchasing power. The list goes on and on.
Proper retirement planning can't and won't eliminate the risk of running out of money in retirement, but it sure can make it much less likely. More importantly, it can allow you the financial freedom to get more joy during your retirement versus spending the next 30 years stressing out that you may or may not go broke as you age.
Many people worry about running out of money in retirement. That's understandable as we don't know how long we'll live, our future costs, and what kind of returns we can expect on our investment and savings. We don't even know what tax rates will be in 10 or 20 years.
There are several ways, however, to boost the odds that your money will last as long as you do in retirement. Here are my 15 favorite ways to help your money last forever in retirement.
1. Keep Your Fixed Expenses In Check
We can debate what is necessary to survive and what is nice in retirement. Keeping the essential must-have expenses to a minimum will make it much easier for your money last in retirement. I am not saying you have to cut everything else out. But there is a big difference between planning to spend a ton of money traveling in style for months on end compared to buying 37 timeshares and committing yourself to spending a ton each year.
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Minimizing your fixed expenses gives you the most flexibility when it comes to spending, which helps your money last longer. You can spend more when times are good. Consider spending less on nice-to-have items when your home's roof eventually needs to be replaced. If you live there long enough, every roof likely must be replaced.
2. Take Steps To Maximize Your Social Security Benefits
If you are retiring early, claiming Social Security may make sense for your retirement plan. If you are still working, you may find a good amount of your Social Security benefits clawed back, assuming you earn too much money. For most retirees, the longer you can wait to claim Social Security, the more helpful it will be toward avoid running out of money in retirement.
I get it; beginning your Social Security benefits at age 62 is just too appealing to many future retirees. A check every month from the government for doing nothing? Can I get it now? Sign me up.
Claiming Social Security on the early side has some significant downsides. It will significantly reduce the income you get now and the money you receive in the future. It also means smaller cost-of-living adjustments later in life when you may desperately need them. Do you think you will need those extra pennies more at age 62 or 102?
Increasing your longevity and health span is excellent for your retirement happiness. However, the longer you expect to live, the greater the odds you will run out of money in retirement. The money has to last longer. My great-grandfather lived to age 99, and I plan on a decades-long retirement. Don't worry. My retirement is also decades in the future.
Think of your Social Security benefits as longevity insurance. That money is in an income stream you can't outlive. The government even increases your benefits (via cost-of-living adjustments over time).
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3. Consider Some Guaranteed Income
Retirement planning was super easy when everyone had a pension and Social Security. If you were wealthy, you had other assets to subsidize your fixed income. Few people have pensions these days, and Social Security was not meant to replace your total preretirement income.
Having some guaranteed income on top of Social Security can help bring peace of mind during retirement. Ideally, you would have enough fixed income to cover your necessities, like housing and food.
Talk with a fee-only financial planner about setting up a guaranteed income stream with part of your retirement savings.
Be cautious about being sold some big annuity with sky-high fees that you can't get out of for years. This should be a small portion of your overall net worth, giving you a little extra peace of mind from some guarantees on your income stream in retirement.
4. Have A Spending Plan For Retirement
I am not talking about budgeting here. A spending plan is a way to ensure you have money for the things most important to you.
This is where we set aside money for exciting stuff like extended travel, luxury shopping, or going out with friends. Meanwhile, budgeting is where some financial know-it-all tells you that you will die poor after buying one cup of coffee at Starbucks
A robust spending plan will help you establish what you want to be able to afford in retirement. From there, a fabulous financial planner can help you determine what type of nest egg will be needed to support your dream retirement.
Not having a spending plan for your retirement income at the beginning of your retirement can greatly increase the risk of running out of money as you age. Your overspending may be hidden behind a run-up in the stock market. While I'm optimistic, it is unrealistic to expect 20%-plus returns, as we saw in 2023, every year of your retirement.
5. Strategically Minimize Taxes On Retirement Income
Remember, it's not how much retirement income you have but how much of it you get to keep. Proactive tax planning doesn't end when you retire. In many cases, tax planning in retirement may get even more important and complicated. If nothing else, do tax planning to avoid increases in your Medicare premiums and to avoid the Medicare surtax on investment income.
How to manage your required minimum distributions? What is you strategy to avoid healthcare expenses from devouring your retirement income. What will Medicare premiums cost? How much Social Security taxation will you get hit with? Even planning on where to draw your retirement income first, should you use the Roth IRA first or last? These are retirement planning that a proactive CPA or certified financial planner can help with. Answering them will help you keep more of your hard-earned money.
6. Don’t Ignore inflation
Have you ever spoken with someone who told you how cheap something used to be way back when? The increase in prices is called inflation. If you are retired for 30 years, inflation will significantly reduce your buying power over time.
Many things you purchase will get more expensive as you age. Inflation will erode your buying power and put pressure on your spending. A plan for inflation will help you avoid running out of money in retirement.
7. Make Healthier Choices Now
Being healthy isn't cheap. However, being sick is even more expensive. Making healthier choices today can reduce your out-of-pocket healthcare costs in retirement. They can hopefully also help you increase your health span as you age.
As a fiduciary financial planner, I must point out the obvious downside to healthier choices today regarding running out of money. Being healthier will likely increase longevity. Increasing your longevity, aka living longer, technically increases your chances of running out of money in retirement.
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8. Have Tax Diversification On Your Retirement Assets
If all your retirement income is derived from a pension or 401(k), your options to minimize taxes are minimal. Ideally, you would have some tax-free income, such as distributions from a Roth IRA. Investing in a nonretirement account is also beneficial when you have budget-busting expenses like that bucket list trip, new roof, or grandchild's wedding.
9. Work Just A Little Bit Longer Before Retiring
A few good things happen when you work longer. First, you have more time to save a bit more money for retirement. Secondly, your existing retirement assets have more time to grow. Thirdly, the later you retire, the fewer years you need to fund your standard of living from your retirement accounts. Lastly, working longer will increase the amount you get from Social Security.
I'm also a big fan of slowly transitioning out of the workforce. If you can take a new role with less responsibility or more vacation time, you may find a work/retirement combo quite appealing.
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10. Face Your Fear Of Smart Investing
Fear of investing will almost invariably bring about the result you are most worried about. That is running out of money in retirement. While interest rates on high-yield savings accounts have increased quite a bit recently, they are still well below the historical average of the S&P 500.
While you may feel that investing in the stock market is risky, an intelligent investing plan will reduce your chances of running out of money as you age.
11. Have A Plan For Long-Term Care
Have a plan to pay for long-term care, and then hope you don't need it. Also, see tip No. 7 – make healthier choices now. Either way, statistically, the odds are enormous that at least one-half of a married couple will need long-term care in retirement. Often, one spouse will require care first, which puts a significant strain on the family's finances, if not depleting them completely. Then, the widow (or widower) is left living off any guaranteed income they might have and Social Security.
Long-term care is expensive. A private room in a nursing home can efficiently run $110,000 per year or more in Los Angeles. Some parts of the country are cheaper; others are more expensive. Even cheaper locales will break most budgets.
12. Look For Ways To Save Money Without Cutting Back
Scrimping and saving is no fun. Look for ways to do so without having to cut back. I negotiate all my recurring bills yearly, which usually saves me around $300 monthly. It takes time and energy, but the savings can be huge. How much would you have to work to net $3,600 after taxes?
For this conversation, that may be the difference between having enough money in retirement or running out of funds.
13. Maximize Credit Card Points And Miles
Please tell me if this sounds amazing: A 70-plus- year-old I work with (plus his husband and two kids) just took an amazing African safari. Sounds fabulous, right? It got even better when I heard they used points and miles to all fly first class. That resulted in them saving more than $50,000 on flights, unforgettable memories with the family, and a happy financial planner. This couple also used a spending plan (tip No. 4) to ensure they had money to pay for the rest of the trip without ruining their retirement income plan. Hotels, food, and tours add up when traveling. I'm a big fan of spending fabulously on things that bring you joy and cutting wisely in places that don't.
All the money they saved with miles and points was money they didn't need to withdraw from their retirement account, and the benefits were tax-free.
14. Buy Your Home Early
If you want to be a homeowner, the benefits are bigger the early you begin owning real estate. If nothing else, the longer you've owned a home, the easier it is to pay off your mortgage.
I'm not a huge fan of rushing to pay off your mortgage. I plan to have one, at least through my working career. I purchased my current home in my 20s. That being said, owning a home is a hedge against the inflation of housing costs and an extra layer of protection against running out of money in retirement.
If you enter retirement and can live off your assets while owning a home, you can think of your home as a bit of longevity insurance. For example, I created a financial plan for a 70-year-old widow, expecting her assets to run out at around 100 years old. Even the possibility of ever running out of money freaked her out. Then, I gently reminded her that her home in Palm Springs would be paid off in about four years. The current value is a few million dollars, and it's safe to assume it will be worth much more in 30+ years when she hits 100. We weren't even using this large asset as part of her retirement income plan.
15. Right-Size Your Home Expenses
Right-sizing your home is a wise way to cut back on fixed expenses. This might even mean staying in your (bigger) house and living like the Golden Girls in retirement. This will help save on utilities and hopefully bring some fun and friendship into your daily life.
This will also give you the most flexibility if you get hit with financial adversity, such as major medical expenses, home repairs, or even a recession.
Whether you are concerned about running out of money in retirement or think you are set, develop a retirement plan to ensure you and your loved one are financially set for the rest of your lives. We've shared 15 tips to help your money last the rest of your life; act today to put one of these (or all) into place. When you are still kicking and enjoying life at 120 years old, you will be happy you did.
As an expert in retirement planning and financial management, I can provide valuable insights and strategies to help ensure that you won't run out of money in retirement. I have extensive knowledge and experience in this field, and I can demonstrate this by discussing the concepts and strategies mentioned in the article you shared. Let's dive into each concept and explore how it can contribute to your financial security in retirement.
Concept 1: Keeping Fixed Expenses In Check
One of the key aspects of retirement planning is managing your expenses. By keeping your fixed expenses to a minimum, you can stretch your retirement savings further. This means distinguishing between essential expenses and discretionary spending. While it's important to enjoy your retirement, it's also crucial to prioritize your financial stability. By focusing on essential expenses and being mindful of your spending, you can create more financial flexibility and increase the likelihood that your money will last throughout your retirement.
Concept 2: Maximizing Social Security Benefits
Social Security benefits play a significant role in retirement income for many individuals. Maximizing your Social Security benefits can help you avoid running out of money in retirement. Delaying the start of your Social Security benefits can lead to higher monthly payments, providing you with a more substantial income stream during your retirement years. By understanding the implications of claiming Social Security early versus waiting, you can make informed decisions that align with your financial goals and long-term security.
Concept 3: Considering Guaranteed Income
In today's world, few individuals have traditional pensions, and Social Security alone may not be enough to cover all your expenses in retirement. Considering guaranteed sources of income, such as annuities or other investment vehicles, can provide added financial security. These sources of income can help cover essential expenses and reduce the risk of running out of money. It's essential to work with a fee-only financial planner to explore options for creating a guaranteed income stream that aligns with your retirement goals.
Concept 4: Having a Spending Plan for Retirement
Having a spending plan is crucial for managing your retirement income effectively. A spending plan goes beyond budgeting and focuses on ensuring that you have enough money to fulfill your retirement goals and aspirations. By establishing priorities and allocating funds accordingly, you can strike a balance between enjoying your retirement and maintaining financial stability. A financial planner can help you create a comprehensive spending plan that aligns with your financial resources and priorities.
Concept 5: Minimizing Taxes on Retirement Income
Tax planning is a critical aspect of retirement planning. Proactively managing your taxes can help you keep more of your hard-earned money. It's essential to explore strategies such as Roth conversions, distribution planning, and asset location to minimize your tax liability in retirement. Working with a proactive CPA or certified financial planner can help you navigate the complex tax landscape and optimize your retirement income.
Concept 6: Accounting for Inflation
Inflation erodes the purchasing power of your money over time. Accounting for inflation in your retirement planning is crucial to ensure that your money lasts throughout your retirement years. By factoring in inflation and adjusting your spending and investment strategies accordingly, you can mitigate the risk of running out of money. A comprehensive retirement plan considers the impact of inflation on your expenses and incorporates strategies to combat its effects.
Concept 7: Making Healthier Choices
Taking care of your health can have a positive impact on your retirement finances. While being healthy may increase longevity, it also reduces healthcare costs in the long run. By adopting healthier lifestyle choices, you can potentially reduce your healthcare expenses and increase your overall financial well-being in retirement. However, it's important to balance the benefits of a healthier lifestyle with the potential for increased longevity and its impact on retirement funds.
Concept 8: Having Tax Diversification
Diversifying your retirement assets from a tax perspective can provide flexibility and optimize your tax situation in retirement. Having a mix of taxable, tax-deferred, and tax-free accounts can help you manage your tax liability and maximize your after-tax income. This approach allows you to strategically withdraw funds from different accounts based on your tax situation and financial needs, ultimately preserving more of your retirement savings.
Concept 9: Working a Little Bit Longer
Continuing to work for a few extra years before retiring can have several benefits. It allows you to save more money, accumulate additional retirement assets, and potentially increase your Social Security benefits. Working longer also reduces the number of years you need to rely on your retirement savings to fund your lifestyle. Additionally, transitioning into a part-time or less demanding job can provide a smoother transition into retirement and help you maintain a steady income stream.
Concept 10: Overcoming the Fear of Investing
Investing wisely is essential for growing your retirement savings and ensuring they last throughout your retirement. While investing always carries a degree of risk, a well-thought-out investment plan tailored to your risk tolerance and financial goals can minimize the likelihood of running out of money. Overcoming the fear of investing and working with a knowledgeable financial advisor can help you develop a sound investment strategy that aligns with your retirement objectives.
Concept 11: Planning for Long-Term Care
Long-term care is a significant expense that can deplete your retirement savings if not properly planned for. Developing a plan to address potential long-term care needs and exploring options such as long-term care insurance or self-funding can provide peace of mind and protect your financial resources. Addressing long-term care in your retirement plan helps safeguard your assets and ensures that you'll have the necessary funds to cover any care needs that may arise.
Concept 12: Finding Ways to Save Money
Finding ways to save money without significantly reducing your quality of life is essential for long-term financial security. Negotiating recurring bills, maximizing credit card rewards, and utilizing points and miles for travel can all contribute to significant savings. By optimizing your spending and finding creative ways to cut costs, you can stretch your retirement funds further and reduce the risk of running out of money.
Concept 13: Owning a Home and Real Estate
Owning a home can provide stability and act as a hedge against rising housing costs in retirement. It's beneficial to start owning real estate early, as the longer you own a home, the easier it becomes to pay off your mortgage. Owning a home can also be viewed as an additional asset that can contribute to your retirement income plan. By factoring in your home's value and potential appreciation, you can enhance your overall financial security in retirement.
Concept 14: Right-Sizing Your Home Expenses
Right-sizing your home expenses involves adjusting your housing situation to align with your retirement goals and financial resources. This may mean downsizing to a smaller home or considering alternative living arrangements, such as co-housing or shared housing. By reducing your housing expenses, you can free up more money for other essential and discretionary expenses, thereby reducing the risk of running out of money in retirement.
By incorporating these 15 concepts and strategies into your retirement plan, you can significantly increase the likelihood that your money will last throughout your retirement years. It's essential to work with a knowledgeable financial planner who can help you customize these strategies to your specific needs and goals. Remember, taking proactive steps to ensure your financial security in retirement today will provide you with peace of mind and enable you to enjoy your retirement years to the fullest.