Are you worried about making your retirement savings last? Running out of money when you retire is a big concern, and you’re not alone. A 2024 study from Allianz Life found that sixty-three percent of Americans are more worried about running out of money than they are about death.

It’s easy to understand why. There’s inflation. And taxes. And concerns about when Social Security will run out of funds and what the stock market will do.  Then, there’s  the possible need (and cost) of home care aides, home modificatins for seniors, or a move to a residential living facility. The list goes on.

While the prospect of draining your resources is scary, a little strategic planning can help you enjoy your retirement and avoid running out of money in your golden years.  Whether retirement is years away or you’re already retired, here are steps you can take to shore up your finances for retirement.   

Understand Your Retirement Needs

Start with the basics. If you don’t want to run out of money in retirement, you need to figure out how much you’ll need to maintain your lifestyle in retirement.  Although retirement eliminates expenses such as the cost of commuting and work lunches, other expenses don’t go away.

Consider your Current and Future Expenses

Look at your costs for housing, food, healthcare, and entertainment—and think about how they might change. A common guideline is that you’ll need about 70-80% of your current income annually in retirement. But you may need more.

Will your mortgage and other debts be paid off?  Will you plan to travel? Will you need a new car? Or a new roof? How much income tax will you owe on your retirement income?

What will it cost you for health insurance? Supplemental policies that cover what original Medicare doesn’t are a big, but necessary, monthly expense. 

Will you be contributing to the support of your adult children or parents who may be in their eighties or nineties (or older)? 

Don’t just “think” about these expenses. Write them down. Use a spreadsheet, or if you prefer, a word document to calculate your expected monthly and yearly expenses.

Once you know what your retirement living expenses will be, you can determine your retirement income needs.

Suggested Reading: Part D and Medicare Annual Change Notices

Estimate Your Retirement Income Sources

Make a list of all your expected sources of income. Depending on your circumstances, your sources of retirement income could include Social Security, pensions, annuity income, and withdrawals from savings accounts and investments. If you’re planning to work part-time after you retire, include a realistic estimate of what those earnings might be.

Be sure to take into consideration what age you expect to be when you retire. Retirement age affects the dollar amount of your Social Security benefits.

Look at the big picture. How big will that retirement nest egg be by the time you retire? (Or if you are already retired, how much do you have now?) How does that compare to your expected living expenses?

Budget for Retirement

Once you’ve created a clear picture of your retirement expenses and income sources you start budgeting for your retirement.  

Maximize Your Savings Efforts

Start early and save consistently. If you haven’t already, start putting away as much as you can into retirement accounts. Long-term increases in the stock market and other investments and compound interest on savings accounts can significantly increase the growth of your savings over time.

If you’re starting later, don’t worry—it’s better late than never. Just increase the amount you save each month.

Utilize Retirement Accounts

Make sure you’re maximizing contributions to your 401(k), IRA, or any other retirement accounts. because your earnings grow tax-deferred or tax-free. If you’re over 50, take advantage of catch-up contributions, which allow you to deposit additional funds into these accounts.

Don’t Underestimate Social Security

While Social Security might not cover all your expenses, it can provide a stable foundation.

This is particularly important for people who are owners of small businesses to realize. Some owners of small corporations minimize their salaries and take the income as profits to reduce the amount of Social Security and other taxes they have to pay. But doing so can also result in a significant reduction in the amount of your Social Security benefit when you retire.

The same is true for people who run cash businesses and don’t report all of their income. Besides the danger of being caught and fined by the IRS for underreporting income, their Social Security benefit on retirement will be minimal.

Invest Wisely to Make Your Money Grow

Some people fear the stock market and keep all their retirement funds in safe investments like bank accounts or CDs. And it is a good idea to keep some cash available. But such safe investments usually don’t earn much compared to other types of investments. The interest on a regular bank account is lower than the inflation rate.

The best approach for most people is to strike a balance between risk and return. Consider a mix of asset classes: stocks, bonds, and cash equivalents. As you age, you might gradually shift your portfolio towards more conservative options like bonds, which offer lower risk but also lower returns.

Remember, diversification is key. Don’t put all your eggs in one basket. Spread your investments across different sectors and asset classes to mitigate risk.

Seek Professional Advice: If investment decisions seem daunting, consider consulting with a financial advisor. They can help tailor an investment strategy that fits your risk tolerance and retirement timeline.

Automate Your Savings: Set up automatic transfers from your checking account to your retirement savings. This “pay yourself first” approach ensures you’re consistently building your nest egg.

Maximize Employer Matching: Many companies offer matching contributions for your 401(k). If you’re working for a company like that, take advantage of the plan. This is essentially free money, so contribute at least enough to get the full match.

Minimize Debt Before Retirement

Reduce your liabilities. As you approach retirement, aim to reduce or eliminate as much debt as possible. Pay off high-interest debt first, like credit card balances, and work towards paying down mortgages or car loans. Entering retirement debt-free will significantly reduce your monthly expenses.

One exception to this strategy could be when the returns on your non-retirement account investments are higher than the interest rates on your loans or mortgage. Your financial advisor can help you make this decision.

Remember, too, that depending on where you live, a good chunk of your mortgage payment might go to pay real estate taxes. So even if you pay off the mortgage, you’ll still have those taxes to pay every year.

Make Your Money Last

Once you are ready to retire, how do you tap into your retirement savings without worrying over every penny you spend? What should you plan to do to make sure you can enjoy life without worrying about your accounts running dry?

Determine a Sustainable Withdrawal Rate

One common approach is to estimate a sustainable withdrawal rate. A sustainable withdrawal rate is the percent of your retirement savings you should be able to withdraw each year without emptying your savings.

The “4% rule,” is one frequently cited rate to make your money last 30 years or more.  Under this method, you withdraw 4 percent of your retirement savings in your first year of retirement, then adjust for inflation in subsequent years.  The 4 percent rule assumes that most of the money you’ll withdraw will come from dividends and interest, not principal.

The sustainable withdrawal rate isn’t fixed in stone. Your expected retirement age, inflation and other factors can all affect how long your nest egg will last. So, too, can the ups and downs of the markets.  

Thus, while the 4 percent rule is a good starting point, the sustainable rate for you might be lower or higher. Consulting with your financial advisor to tailor a withdrawal strategy specific to your needs and risk tolerance.

Plan for Required Minimum Distributions (RMDs)

 Be aware of RMDs, which are required withdrawals from certain retirement accounts starting at age 72.  If you don’t take them, or don’t take them on time, the IRS charges you a penalty.

The amount you have to withdraw is determined by the balance in your accounts at the end of the previous calendar year and something the IRS calls a life-expectancy factor.  You divide the IRS life expectancy factor into the year-end balance to determine the amount of the RMD. As the life expectancy factor goes down, the size of your RMD goes up. You can use the IRS worksheets for calculating your RMD if your investment advisor or firm doesn’t provide the information for you.

Beware of Financial Scams and Abuse

It’s natural to trust that advisors we turn to, family members, and friends will always have our best interests in mind. But unfortunately that’s not always the case. There are callous and criminal individuals in this world who target seniors and try to siphon away their savings. Hopefully, that will never happen to you. Nevertheless, it would be wise to learn about the signs of financial scams and exploitation and know what to do if you think you or someone you know is being exploited. Our guide to elderly financial abuse provides a good overview of the issue.

Keep a Flexible Mindset

Adjust Your Plans as Needed: Your needs and the economy will change during retirement. Review and adjust your spending, savings, and investment strategies regularly. Stay informed about financial trends and tax laws that could affect your retirement savings.

Consider a Phased Retirement: Instead of retiring completely, consider easing into retirement. A phased approach allows you to tap into a portion of your retirement savings while still earning income. It also helps you to stay mentally active and engaged.  

Create New Sources of Income.  Consider part-time work, consulting, or turning a hobby into an income stream if you enjoy staying active and need extra money. This can also delay the need to withdraw from your retirement funds.  

Remember, Retirement Is a Marathon, Not a Sprint

Stay Patient and Focused: Retirement planning is a long-term endeavor. Keep your goals in sight and adjust as you go along. It’s okay if things don’t always go to plan—flexibility is a key part of any long-term strategy.

Enjoy the Journey: While it’s important to plan for the future, don’t forget to enjoy the present. Balance saving for tomorrow with living a fulfilling life today.

Closing Thoughts

Making sure you don’t run out of money in retirement is about careful planning, wise investing, and adapting to changing circumstances. By taking these steps, you can help secure a financially stable future.

Disclaimer: The information on this website is provided for informational purposes only and should not be considered as legal, tax, accounting, or medical advice. Please consult a licensed professional for help with any specific questions and issues you may have.