Retired or close to retirement?
No matter how much money you save for retirement, it’s an inescapable fact that there’s a real chance that you can outlive your retirement savings. After a lifetime of diligent retirement planning, this would be a truly unfortunate outcome.
What are the reasons why you might outlive your retirement savings and, more important, how can you avoid that happening?
The Reasons You Might Outlive Your Retirement Savings
There are several big picture factors that make the prospect of outliving your retirement savings a very real threat. Here are four of them, and they are all beyond your control.
1. Life spans are increasing.
When Social Security was enacted back in 1935, the average lifespan was about 65 years. It’s no surprise then that the age of retirement was set at 65. The situation is very different today. Not only is the average lifespan today sitting at around 78, but many people live well into their eighties, and often their nineties. That means retirement assets are needed to cover more than a few years. If you retire at age 65, you may need them to last for 20, 25, or even 30 years.
This is the fly in the ointment of all retirement planning. Not only is inflation a major X factor in determining how much money you’ll need by the time you retire, but it will continue to be a problem even after you retire. The million-dollar retirement portfolio that you accumulated by age 65 may prove to be completely inadequate but the time you’re 75 or 80. The combination of inflation, plus plan withdrawals, can whittle down a portfolio in short order.
3. Boomerang kids.
This is a growing phenomenon over the past decade or two. Young people, unable to earn living wages, saddled with large student loan debts, or dealing with the problems of divorce, are coming back to live with their parents in increasing numbers. This holds open the very real possibility that one or more of your children may come back to live with you at some point during your retirement. When this happens, it can not only raise your basic cost of living, but the adult child may be in need of direct financial assistance.
4. Interest rates are microscopic.
With interest rates on fixed income investments now hovering in the low single digit range, you will be more dependent on the equity markets for income than previous generations of retirees have been. If most of your portfolio is sitting in stocks, you could lose a significant amount of money in a major market downturn. As a retiree, it won’t be as easy to recover from those losses.
Okay – enough bad news. What can you do to avoid or at least minimize some of these outcomes?
General Objectives to Keep from Outliving Your Money
We’ll start by outlining basic objectives to avoid outliving your retirement savings, then we’ll take a look at some specific strategies later.
Reduce the number of years you’ll be in retirement.
This is a strategy that deals with the increased longevity issue. The average 65-year-old can reasonably expect to live to be 85 – that will mean that your retirement portfolio will need to last for 20 years. But if you can delay retiring until age 70, you will reduce your dependence on your portfolio from 20 years down to 15. That by itself is one of the most effective strategies to prevent outliving your retirement savings.
Delay tapping your retirement assets.
You can still retire at your normal retirement age, but if you can avoid withdrawing funds from your retirement savings, it will have the same effect as delaying your retirement age. You may be able to do this by relying on Social Security and pension income, by keeping your expenses low, and by using some income sources that we’ll talk about in the next section.
Allow more time for your retirement assets to grow.
By delaying your retirement, or delaying tapping your retirement assets, you will give your portfolio more time to grow. As an example, let’s say that you have a $600,000 retirement portfolio at age 65. If you delay making withdrawals until age 70, and your portfolio grows at an average annual rate of 8%, your portfolio will grow to $881,597. That’s an increase in your retirement portfolio size of nearly 50%, just by waiting five years.
Take good care of your health.
This is another retirement X factor – and an underestimated one of that. Healthcare becomes a more significant expense as we age, and can raise your overall cost of living in retirement. Though we normally don’t think of it as being a part of retirement planning, taking good care of your health is actually one of the most effective expense reduction strategies you can implement. But you have to do it now, while you are young and healthy. It’s much easier to retain good health, then it is to regain it after it’s been lost.
One more point about good health…many of the strategies that you can implement to keep from outliving your retirement savings will require good health.
Specific Strategies to Keep from Outliving Your Money
We’ve just covered general objectives to avoid outliving your money. Now let’s look at some micro strategies that will help you to make those happen.
Continue working while you are able.
If you are going to delay retirement, or tapping your retirement portfolio, you’ll need other income sources in order to make that happen. You should have Social Security income at a minimum, but you can supplement that by continuing to work. You may find that you are able to survive simply by adding income from a part-time job or business to your Social Security check each month.
Have a business.
Many people who are self-employed never retire. The business becomes a part of who they are, and they often enjoy the work they do. The advantage to having a business is that there is no mandatory retirement age – you can literally work in your business for long as you want. This can be an important income supplement during your retirement years. And just as significant, you may be able to sell the business for a substantial amount of money that can be used as additional retirement assets.
Develop passive income sources.
This will be especially important if you don’t have any kind of pension plan, and don’t want to actively work during your retirement years. Passive income can include investment real estate, being a silent partner in a business, or even holding a mortgage for note on which you will collect interest payments for many years.
Start a Roth IRA.
Virtually every other tax-sheltered retirement plan is subject to required minimum distributions (RMDs). When you turn 70 ½ you will be required to begin making pro rata withdrawals from all of your retirement plans. The one exception is the Roth IRA. That exception is an important one – it means that your portfolio can continue to grow for the rest of your life, without being drawn down by distributions. You can think of a Roth IRA as being something of a retirement plan of last resort. That’s the money you will have available during the later stages of your life.
Save outside your retirement plan.
One of the best ways to delay taking distributions from your retirement portfolio, is by having other assets that you can live on during the early years of retirement. Since these are not tax-sheltered plans, you’ll also have the advantage that any withdrawals taken will not be taxable. And any money that is left over when you begin withdrawing from your retirement portfolio can be used as a large emergency fund. Yes, you’ll still need one of those even when you retire.
Get out – and stay out – of debt.
This has a two-part benefit. Not only does the absence of debt keep your living expenses in retirement to a minimum, but not having any debt before retirement will make it easier to save larger amounts of money in your retirement portfolio. You should develop a plan to become debt-free as soon before retirement as possible.
Own your home free and clear.
Like taking care of your health and getting out of debt, paying off your mortgage will have a major positive impact on reducing your living expenses in retirement. This will make it easier for you to avoid taking money from your retirement portfolio during the early years of your retirement. But equally important, it will provide you with a major asset to sell to raise additional capital for your retirement. It’s a win no matter how you work it.
The possibility to outlive your retirement savings has to be taken seriously. But so do the strategies that will enable you to avoid it. Implementing just a few of these strategies should help you have plenty of money throughout your retirement.
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