One of the biggest fears in retirement is simple: What if I live longer than my money does?
Nobody knows how long they’ll live. We don’t know what the stock market will return over the next 20 or 30 years, what inflation will look like or whether we’ll face major unexpected expenses.
That means no retirement calculator or withdrawal rule can guarantee you’ll never run short. But you can dramatically reduce the risk.
The key is not relying on one perfect strategy. It’s building several layers of protection into your retirement plan so that if one thing goes wrong, you still have other ways to adjust.
1. Keep Your Fixed Expenses Under Control
Start with the expenses you have to pay every month, whether the stock market is up or down.
Housing costs.
Property taxes.
Insurance.
Utilities.
Food.
Car payments.
Debt payments.
The less money you absolutely have to spend each month, the easier it is to weather financial surprises.
Imagine two retirees who each normally spend $80,000 a year. One needs $75,000 just to cover basic expenses. The other needs $50,000 and spends another $30,000 on travel, restaurants and other extras.
They’re spending the same amount today, but the second retiree is in a much stronger position. If the market has a terrible year, that person can temporarily spend less without threatening the basics.
That’s one reason entering retirement with large mortgage, car or other debt payments can make your plan more fragile.
You don’t have to eliminate every fixed expense. But the more breathing room you create, the more choices you’ll have later.
2. If the Numbers Are Tight, Consider Working a Little Longer
Working another year or two can have a surprisingly large impact on your retirement plan.
You’re potentially:
Adding another year of retirement contributions.
Giving your existing investments another year to grow.
Reducing the number of years your portfolio has to support you.
Increasing your future Social Security benefit if you delay claiming.
Continuing to receive a paycheck rather than withdrawing from your investments.
You don’t necessarily have to continue working full-time, either. Part-time work can provide extra income while still giving you much more freedom.
For someone whose retirement plan is comfortably funded, working longer may not accomplish much financially.
But if your numbers are marginal, retiring at 67 instead of 65 could be one of the most powerful changes you can make.
3. Think Carefully Before Claiming Social Security Early
It’s tempting to think about Social Security as a break-even calculation:
“If I start collecting now, how old will I have to live before waiting would have paid off?”
There’s another way to think about it.
Social Security is one of the few sources of retirement income that can continue for the rest of your life and receives inflation adjustments.
That makes a larger monthly benefit especially valuable if you live into your 80s or 90s.
That doesn’t mean everyone should wait until age 70. Your health, marital status, financial resources and other circumstances matter.
But if your biggest fear is running out of money late in retirement, maximizing guaranteed lifetime income deserves serious consideration.
For married couples, this can be especially important for the higher earner because delaying may also increase the benefit available to the surviving spouse.
4. Don’t Put Your Retirement Spending on Autopilot
You’ve probably heard of the 4% rule.
The traditional version says that you withdraw 4% of your portfolio during the first year of retirement and then increase that dollar amount each year with inflation.
It’s a useful starting point. It isn’t a commandment.
Suppose you retire with $1 million and the stock market plunges during your first two years of retirement. Continuing to increase withdrawals as though nothing happened puts more pressure on the portfolio.
Instead, you might skip an inflation increase, postpone a major vacation or cut other discretionary spending for a year or two.
You don’t have to panic every time the market falls 10%. But you also shouldn’t blindly follow a withdrawal formula while ignoring what’s happening to your money. A flexible retirement plan is safer than a rigid one.
5. Keep Enough Safe Money to Avoid Selling Stocks in a Crash
One of the biggest dangers to a new retiree is a major bear market early in retirement. It’s called sequence-of-returns risk.
If the stock market falls sharply while you’re withdrawing money, you may have to sell investments at depressed prices. Those shares are then gone and can’t participate in the eventual recovery.
One way to reduce that risk is to keep several years of expected portfolio withdrawals in conservative investments.
That doesn’t mean several years of your total living expenses.
Suppose you spend $70,000 annually but receive $45,000 from Social Security and a pension. Your portfolio needs to provide $25,000. Five years of portfolio withdrawals would be about $125,000.
That money might be held in some combination of cash, money market funds, CDs or high-quality short-term bonds.
The purpose isn’t to earn the highest possible return. Your safe money is there to give your stocks time to recover.
6. Don’t Get So Conservative That Inflation Becomes the Bigger Risk
Being afraid of running out of money can lead retirees to make another mistake: moving almost everything into cash and bonds. That may protect you from stock market volatility, but it creates a different problem.
A 65-year-old could easily be investing for another 25 or 30 years. Over that kind of time period, inflation can dramatically increase the cost of groceries, insurance, health care, property taxes and almost everything else.
You still need growth.
Think of your retirement portfolio as having two jobs: You need safety for the money you’ll spend relatively soon and growth for the money you may not spend for decades.
Going too far in either direction creates risk.
7. Have a Backup Plan Before You Need One
A good retirement plan shouldn’t depend on everything going right.
Ask yourself what you would do if stocks performed poorly for a decade, inflation stayed high or you lived far longer than expected.
Your backup options might include:
Reducing discretionary spending.
Downsizing your home.
Using home equity later in life.
Working part-time during the earlier years of retirement.
Spending money that you originally hoped to leave to your heirs.
Converting part of your savings into guaranteed lifetime income.
That last option can include a simple immediate fixed annuity.
An annuity certainly isn’t necessary for everyone, and you should understand exactly what you’re buying before turning over a chunk of your savings to an insurance company. But the concept behind it is useful.
The more of your essential expenses that can be covered by reliable lifetime income, the less dependent your standard of living is on your investment portfolio.
You Don’t Need To Predict the Future
The goal isn’t to develop a retirement plan that correctly predicts what the next 30 years will look like. You can’t.
Instead, build a retirement that can survive a variety of different outcomes.
Keep your fixed expenses reasonable. Be thoughtful about Social Security. Start with a sensible withdrawal rate but remain flexible. Keep enough safe money that you don’t have to sell stocks during a crash, while maintaining enough growth investments to protect against inflation. And know what you’ll do if things don’t go according to plan.
No single step guarantees your money will last.
Put them together, however, and you’ve created something far more valuable than a prediction: a retirement plan with room for things to go wrong.
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