Sept. 25, 2019
Running out of money in retirement is one of the biggest concerns for retirees. People do have reasons to be concerned: healthcare is expensive; most people are living longer; the news talks about the looming recession; the list goes on and on. Depending on your political affiliation, Trump scares the crap out of you, or you worry about the day when Trump won’t single-handedly be saving the world economy.
Proper financial planning can’t completely eliminate the risk of running out of money in retirement, but it sure can make it a lot less likely. More importantly, it can allow you the freedom to get more joy during your retirement, versus spending the next thirty years stressing out that you may or may not go broke during retirement.
Widow Entering Retirement Scared of Running Out of Money
I was inspired to write this post by a widow I recently met with who is obsessed with not running out of money, to the point where I think her worrying about it, might be worse than running out of money in retirement.
Inflation was one of her biggest fears. She was in her late Sixties and assumed she would live at least another 30 years. She did that math, she said, and if she lived for 30 more years, assuming 3% inflation things would cost 30% more. Where would that extra money come from?
I knew that this situation is much worse than she believed. With inflation compounding at 3% a year, after 30 years, things would cost 242% more– eight times the increase she had assumed.
Something that cost $100 today would cost about $242 in 30 years. I didn’t want her to have a heart attack or stroke in my office, so I saved this gem for a bit later, as part of the planned solutions to help her not run out of money in retirement.
We ended up helping her develop a comprehensive retirement plan that would help her money last until at least 100 years old. She (and her deceased husband) had done all the hard work; she had Long Term Care Insurance, a home that was almost paid off, and adequate assets to live off if handled wisely.
She was expecting to end up living off ramen as a poor old bag lady. The reality was that she was in great shape; she just needed some guidance to help her realize that. We took her through the thirteen tips listed below, and she was able to actually increase her standard of living while extending the time that her retirement income would last.
Few retirees are in as good financial shape as the widow mentioned above. Most will need every single penny of investment income, Social Security, and any other way they can make ends meet. What may seem like an amazing retirement income or pension benefit today (or Social Security, or annuity payout, etc) may not be enough to squeak by in your later years.
Many people worry about running out of money in retirement. That’s understandable since we don’t know how long we’ll live, what our future costs might be, and what kind of returns we can expect on our savings.
There are several ways, however, to boost the odds that your money will last as long as you do in retirement. Here are my thirteen favorites ways to help your money last forever in retirement.
Minimize Your Fixed Expenses
When you want to make your money last longer, it is imperative that you minimize your must-have expenses. These are the things that you really can’t go without. I’m talking about food, shelter, transportation, and even things like debt payments and insurance.
Right-sizing your housing is an amazing way to cut back on fixed expenses. This might even mean staying in your (bigger) home 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 do get hit with some financial adversity. Say some major medical expenses, home repairs, or even a recession.
Maximize your Social Security Benefits
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!
Starting Social Security too early will greatly reduce the benefit you get now as well as 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 62 or 102?
The longer you expect to live, the greater the odds that you will run out of money in retirement. My great grandfather lived to 99, I’m planning on a long retirement. Think of your Social Security benefits as longevity insurance, it is in income stream you can’t outlive.
Consider Some Guaranteed Income
Back in the day, people could retire well on pensions and Social Security. Both were expected to be nice income streams paying out for the rest of your life. Today, it is beneficial to have at least some guaranteed income in retirement. Ideally, you would have enough 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. This may be with the Rich Person Roth, designed to provide tax-free income for life. Or more commonly, some type of guaranteed annuity income.
Avoid getting sold some big annuity, with sky-high fees that you can’t get out of. This should just 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.
Have a Retirement Spending Plan
We all hate budgeting, right? A spending plan is like a budget, but hopefully a little more exciting. This is where we set aside money for fun stuff like travel, or shopping, or going out with friends. Budgeting is where some financial know-it-all tells you that you are going to die poor after buying one cup of coffee at Starbucks.
Having 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 figure out what type of nest egg will be needed to support your dream retirement.
Not having a plan for retirement income, or even just a spending plan, at the beginning of your retirement can greatly increase the risk of running out of money as you age. The overspending of many current retirees has been hidden by the bull market of the past ten years. Not to be negative, but the times won’t always be as good as they are today.
As a basic rule of thumb, 4% is considered by many to be a good starting point for choosing a withdrawal rate in retirement. For example, if you wanted $300,000 of income in retirement, you would need around $7,500,000 in retirement assets to generate the desired income.
To put that another way, if you saved a million dollars for retirement, you could expect to generate around $40,000 per year of income from the accounts. Plus Social Security. Would you be happy living on $40,000 per year in retirement? Guessing that is a big fat NOOOOOO! for most of you.
Don’t Ignore Tax Planning
Remember, it isn’t what you make but what you keep. Tax planning doesn’t end when you stop working. In many cases, tax planning in retirement may get even more important and complicated.
With the 4% rule, we are talking about needing a million dollars to generate just $40,000 of income. We are not even talking taxes here. So $40,000 from a 401(k) or IRA is worth less (after taxes), that the same withdrawal from a brokerage account, which is worth even less than similar tax-free income from a ROTH IRA.
Required minimum distributions, healthcare expenses, Medicare premiums, Social Security Taxation. Even planning on which retirement accounts to pull money from- should you use the ROTH IRA first or last? Working with a proactive CPA or Certified Financial Planner can help answer all of your retirement tax planning questions, and help you keep more of your hard-earned money.
I just had a conversation with a wonderful 80-year-old, who was telling me that movies were just a nickel when they were a kid. I responded, “I watch movies on Netflix; they are free.” OK, well I guess $8.99 per month (I have the cheapo plan), maybe less if you share the password or are couples and watch movies with others.
While this is a terrible example of inflation, $8.99 is still a lot more expensive than 5 cents. The reality is that if I want to go to the nice theater in my neighborhood of Los Angeles, I’m going to plop down more than $20 per ticket to see a movie, which is why I rarely go. If you add popcorn and parking; a person could go broke. Let me tell you; I will never be broke.
All joking aside, things will get more expensive as you age. Inflation will erode your buying power, and put pressure on your spending. Having a plan for inflation will help you not run out of money in retirement.
Make Healthier Choices
Being sick is miserable and expensive. Many chronic health conditions are preventable. Making healthier choices throughout life can reduce your chances of suffering from diabetes, high blood pressure, arthritis, high cholesterol, and a long list of other ailments.
Spending the money on a healthy lifestyle as well as regular screenings and proper medical care will improve your quality of life and help reduce your overall healthcare costs in retirement. You think that colonoscopy pricing was ridiculous, wait till you have to pay for cancer treatment. You’d probably have to sell a kidney just to pay for parking at Cedars Sinai (the big hospital in my neighborhood). As an added bonus, hopefully, you will also feel better, and enjoy life more.
Work Just a Little Longer
If you had asked me in my twenties how long I wanted to work, you would get a very different answer than today. Back then, I thought I wanted to reach financial freedom by forty, and retire by fifty. Times, have changed, and so have I. I absolutely love helping people live happier, healthier, and wealthier lives, and I hope and plan to do it forever. Still planning to be able to retire by 50, but I will just keep working as long as I am still passionate about it, and am healthy enough to do it.
For you, even waiting just one extra year to retire can greatly increase your standard of living for the rest of your life. Your Social Security alone will be about 8% greater each month for the rest of your life, by waiting just one year to claim benefits.
Your retirement assets will also have one extra year to grow. Since we are talking about ways to make your money last the rest of your life, working longer means your money doesn’t have to work as hard to last for the rest of your life.
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.
Face Your Fear of Smart Investing
Savings rates are the banks are in the toilet right now, and have been for over a decade. If you leave money in the bank, you are losing money each and every day to inflation. Fear of investing will almost invariably bring about the result your most worried about: running out of money in retirement.
If you put your money in a CD at the bank, earning 2% per year, you would need around $3,000,000 to produce just $60,000 in retirement income. That is before taxes. Just so you know, bank interest is taxed as regular income, which will likely be less tax-efficient than smart investing.
Don’t even get me started on money sitting in savings accounts paying just 0.01%. It would take 7200 years for your money to double. A million dollars earns just $100 in interest per year at 0.01%. Even the most frugal among us couldn’t live on $100 per year.
Plan for Long Term Care
Plan for long term care expenses and then hope you don’t need it. Also, see tip #7 – make healthier choices. Either way, the odds are huge that at least one half of a married couple will need at least long term care in retirement. Often, the man will go in first, which puts a huge strain on the families finances. If not depleting them completely. Then the widow is left living off any guaranteed income they might have, as well as Social Security.
The widow I mentioned at the beginning of this post, saw all the bills and expenses they rang up caring for her husband. He passed after a long battle with a terminal illness. He also spent nearly a year in a Long Term Care facility. Luckily they had LTC insurance, which covered about half of the long term care expenses.
Long term care is expensive. A private room in a nursing home can easily 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.
Consider long term care insurance or Life Insurance with a Long Term Care Rider, or you can just save more money for retirement.
Look for Ways to Save without Cutting Back
Scrimping and saving is no fun, so look for ways to save without having to cut back. I negotiate all of my recurring bills every year, and this usually saves me around $300 per month. It does take some time and energy, but the savings can be huge. That is $3,600 per year, what would you do with all that extra money?
For this conversation, that may be the difference between running out of money in retirement, and not.
Maximize Credit Card Points and Miles
Tell me if this sounds amazing to you: my 71-year-old client (and his husband) just took their 93-year-old parents on a luxury trip to Europe. Fabulous right? It gets even better when I heard they used points and miles to all fly first class- saving over $30,000 on flights.
Dream trip with the family, and a happy financial planner with the savings from miles and points. This couple also used a spending plan (tip 4) to make sure they had money to pay for the rest of the trip, without breaking the bank. 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.
Buy Your Home Early
I’ll admit 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 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 last-minute safety net. For example, I ran a financial plan for the widow mentioned at the beginning of this post, where we expected her assets to run out at around 100 years old. Even the possibility of running out of money freaked her out. Then I gently reminded her, that her home in Beverly Hills, would be paid off in 3 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.
Assuming all the thing she was worried about happening, she still has the equity in the home to fall back on. Her goal is to stay there, and not have to touch the equity, but I think there is value in knowing that she has the pool of money to tap into if she needs to. Plus, owning the home (beyond maintenance), she controls her housing costs. Her mortgage payment will go away in a few years, and property tax increases are regulated in California, thanks to Prop 13.
Whether you are concerned about running out of money in retirement or think you are set, develop a financial plan to ensure you and your loved one are set financially for the rest of your lives. We’ve shared 13 tips to help your money last the rest of your life, take action today to put one of these (or all of them) into place. When you are still kicking and enjoying life at 105 years old, you will be happy you did.