One of the biggest concerns on a pre-retiree’s mind is, “Do I have enough money to retire?”
Because if you don’t have enough money to retire, but you decide to retire anyway, you run the risk of running out of money in retirement.
This is a big fear of many retirees. And it should be. For most people money represents the following:
- Ability to live the lifestyle I want
- Ability to travel
- Ability to enjoy life to the fullest
It is true that money can’t buy happiness. But it is also true that the lack of money will also not give you happiness. In fact, some of the most unhappy people you will ever meet will be the ones that are having a hard time paying their bills.
And running out of money in retirement is a real risk retirees (and pre-retirees) face. In fact, a Bankrate survey from February of this year showed that 23% of respondents were worried that their savings would run out.
And if you look right below that one, it says that 18% are worried about not being able to afford daily expenses.
Those two worries are essentially the same thing: I’m not going to have enough money.
5 Ways To Not Run Out Of Money In Retirement
So what is the solution? Here are 5 actionable steps you can take to not run out of money in retirement.
1. Maximize your Social Security benefits.
Every extra dollar you can get from Social Security is one extra dollar that you won’t have to pull from your savings to meet your retirement goals. This helps your portfolio last longer. Some strategies to maximize your Social Security benefit include:
- Working at least 35 years
- Delaying beyond age 62
- Drawing spousal benefits while delaying your own personal benefit until age 70.
For most retirees, Social Security will be a significant part of their income in retirement. And it is a lifetime source of income. And most importantly, it has a cost of living adjustment in it to help you keep pace with inflation.
2. Determine the cost of your retirement lifestyle
Get a ballpark estimate of how much your monthly expenses will be in retirement to live the lifestyle that you want and can afford. Obviously, the higher your expenses the more income (and savings) you will need to make sure you don’t run out of money in retirement.
To make it more convenient on you to determine your monthly expenses, pull out your last credit card statement. Also, pull out your last checking account statement.
That should show you where most of your money is going. And you can determine which of the expenses are recurring.
Also, if you are not retired yet and you know that some of your current expenses will go away when you retire (maybe you will have paid off your home mortgage by then), then you can exclude those amounts when determining how much retirement income you will need.
3. Determine your retirement income sources
Now you need to add up your sources of income in retirement. These will be your big sources:
- Social Security
- Pension (if you are so lucky to have one)
- Annuity payments
- Interest / Dividends
The most important of those is Social Security. That’s why the first step is to maximize what you get from it.
If you have a pension make sure you include it. Also, know when the pension goes into effect. Some pensions will not start paying until you reach age 65. Some will let you take income immediately upon retirement. Check with your benefits department to know for sure.
If you have other sources of income that you think will last the rest of your lifetime include those. This may include rental income from properties you intend to hold on to forever.
4. Determine the shortfall between your income and expenses
Once you know what your retirement expenses will be and your retirement lifetime income sources, you can then determine if there will be a shortfall. If you don’t have enough retirement income to cover your retirement expenses you then need to look to your savings / investments.
At this point you want to find the lowest risk, lowest cost way to fill in the income shortfall. You must fill in this income shortfall every year for the rest of your life.
And the income shortfall is likely to get bigger in the future as inflation will very likely cause your expenses to increase faster than your retirement income.
The reason for this is because pensions often times will not have a cost of living increase in them. And the cost of living increase in Social Security often times will not be enough to keep up with inflation.
5. Determine the lowest risk, lowest cost way to fill the income gap
So you’ve calculated your income shortfall and how much you are going to have to pull from savings / investments to cover your retirement expenses.
Now you need a plan to fill the shortfall without taking too much risk. It would probably be a bad idea to put all your savings into a highly volatile investment that exposes your portfolio to a lot of risk.
One strategy to consider is using an immediate annuity. You can take a portion of your savings / investments and put it into an immediate annuity. This type of annuity would immediately begin paying you an income for the rest of your life.
The income amount you’d need from an immediate annuity would be just enough to fill the income gap.
But what about inflation? In a few years you will probably need more income to keep up with the increases in your expenses.
At this point you have a couple of options. In many cases it is a good idea to have a portfolio invested in the market. Just because you are invested in the market doesn’t mean that you have to choose a very risky portfolio.
It is possible to choose a more conservative portfolio that incorporates more fixed income investments (i.e. bonds) to help reduce volatility in the portfolio.
Having your portfolio invested in the market gives you a better chance of keeping up with inflation. The potential growth of the investments can help in overcoming the increase in cost of living many years down the road.
Another strategy is to use a fixed index annuity (or a combination of fixed index annuities). Many fixed index annuities allow you to attach an optional income rider to them. This income rider will tell you what level of income you can pull from the annuity at a specific point in the future.
This gives you great predictability on your income sources in retirement.
So when inflation has caused your expenses to outpace your income 10 years down the road, you can know that the fixed index annuity will contractually guarantee additional income for you for the rest of your life.
So even if the value of your annuity falls to $0 you know that the insurance company is contractually obligated to keep paying your income.
This is a very comforting guarantee that many retirees (and pre-retirees) are looking for.
Using these 5 steps above will help you to not run out of money in retirement. Once you know how much income you need, it’s really a matter of finding the lowest risk, lowest cost way to meet your spending needs for the rest of your life.
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And if you need help making sure that you don’t run out of money in retirement, then CLICK HERE to get on my calendar. I’ll point you in the right direction.