A Lot of Us Will Run Out of Money in Retirement

A recent study by the Employee Benefits Research Institute finds that a lot of people across income categories are at risk of running out of money in retirement.

Aug 17, 2014 at 12:28PM

Piggy
Flickr / 401(k) 2013.

A recent report by Jack VanDerhei of the Employee Benefits Research Institute should worry you. 

This detailed analysis of who is likely to run out of money and when finds that a number of people in every income category could be facing shortfalls in the future. 

Assuming you're retired for 35 years (generous, but not totally unrealistic), and factoring in nursing home and home health care costs: 

  • 83% of those in the lowest income quartile will run out of money,
  • 47% of those in the second-lowest quartile will run out,
  • 28% of those in the second-highest quartile will run out, and 
  • 13% of those in the highest income quartile will run out.   

The statistics for living 20 years are better, but hardly comforting (even there, 8% of the highest earners will run out of money). If you also take out nursing care expenses, the percentages go down again -- but, much as I like to believe that I'm going to be doing handstands as an 85-year old, I can't say that I would be comfortable counting on it. 

What can we learn? Even if you're pretty well off, there's still a chance that you won't have enough money to get through your retirement.

Why should I believe you?
This study is unique in that it focused not just on predicted income patterns but on expenditures. The arguably complex model thus looks at risks ranging from longevity, investment performance, and the possibility of costly health care requirements. 

It's also more poignant when taken next to the Social Security Administration's large survey of retirement expenditures, released in 2013. On average, fully 75% of retiree's expenses went to the basics: Housing, food, health care, and transportation. In other words, it doesn't appear that most people are going crazy buying pink Cadillacs and single malt.

While your specific needs in retirement might differ, looking at these kinds of averages is rather instructive. And in this case, somewhat scary. 

So what do we do? 
Ah the eternal question. While there are never any guarantees in life, there are a few things you can do to reduce the probability of major retirement shortfalls. 

First, think about your future housing situation. According to the Social Security Administration, the majority of retirees' expenditures went to housing, for an average of about 35%. Is there any  way to reduce that cost? 

Healthy

Flickr / macieklew.

Secondly, for the love of all that is good and merciful, stay healthy. Healthcare expenses are potentially crippling, so do what you can to avoid the most obvious sources of physical decline. Exercise, eat right -- you know what has to be done. 

Consider buying long-term care insurance. These policies can cover extended nursing home stays or in-home care should something go wrong. According to the AARP, they tend to be cheaper the earlier you buy them, so think about getting one while you're younger. 

Save more. Perhaps the image of the penny-pinching millionaire isn't so bad -- after all, the more you set aside and the less you spend, the more of a cushion you'll have later on. See where you can contribute more to savings, or earn more income to devote to them, and try to maximize your retirement contributions to the extent possible. 

Finally, consider working in retirement. Maybe you have some expertise you can share as a teacher or lecturer, or perhaps you'd enjoy consulting. By the SSA's calculations, those who were able to spend the most in retirement tended to do so with earned income. Think of it as a way of keeping up your appreciation for that golf club membership, or funding -- guilt-free -- that long summer painting watercolors in Florence.

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