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; 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 during retirement.
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.
How much money will you need to live comfortably 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 to make 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.
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 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 in helping you avoid running out of money in retirement.
I get it; beginning your Social Security benefits at 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.
Claiming your Social Security benefits early will significantly reduce the benefits you get now and the income 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 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).
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 pre-retirement 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.
A smart spending plan will help ensure you have money for that bucket list vacation 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
SBUX
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%+ 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 RMDs? 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 questions working with a proactive CPA or certified financial planner can help answer. Answering these retirement planning questions 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.
You don’t have to look l ike a fitness model to make healthier choices that can improve your … [+]
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.
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 non-retirement 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.
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 #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, the man will require care first, which puts a significant strain on the family’s finances, if not depleting them completely. Then, the widow 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 save 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 running out of money in retirement and not.
Credit card point can help you save money on travel now and in retirement.
13. Maximize Credit Card Points And Miles
Please tell me if this sounds amazing: my 70+-year-old client (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 over $50,000 on flights, unforgettable memories with the family, and a happy financial planner. This couple also used a spending plan (tip 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.
The earlier you buy your home the more benefits you may get from home ownership.
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 twenties). 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.
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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.