One of the biggest fears among workers aged 55 and older is running out of money in retirement. Considering about half of those workers don't have much in the way of retirement savings, they absolutely should be concerned their meager nest eggs won't last. It's hard to live off a retirement account with only a couple years' worth of living expenses.
But there are steps you can take in your working years and as you approach retirement to ensure you never run out of money (barring a complete global economic catastrophe). Here are three simple ways to make sure you don't outspend your nest egg.
1. Understand safe withdrawal rates
As the name suggests, a safe withdrawal rate is the rate at which you can draw down your retirement accounts with minimal risk of going bankrupt. The 4% rule is often considered a safe withdrawal rate for most, but there are several flaws with that number.
The biggest problem with the 4% rule is that everyone's situation is different. What age you retire, your portfolio asset allocation, and your risk tolerance will have a major impact on how much you can "safely" withdraw every year.
On top of that, economic factors will have an impact on safe withdrawal rates as well. When the market is at all-time high valuations like it is today, safe withdrawal rates go down. But if the stock market has a major correction right before you retire, your might be able to increase your safe withdrawal rate, offsetting some of the declines.
Understanding how various factors will impact your safe withdrawal rate is a key step to take in determining how big your nest egg needs to be to fund your retirement. It's also key to establishing a budget in retirement instead of spending down your portfolio without a plan.
2. Invest in assets that pay you regularly
If you'd rather not deal with the math of safe withdrawal rates, another option is to invest in assets that pay you to hold them.
The simplest option for most investors is dividend stocks. Retirees can put together a portfolio of stocks with steadily increasing dividends and simply live off the payments those companies make to shareholders. If picking stocks is too much work, you can buy a dividend growth fund. There is a risk that dividend payments will decline or stop altogether in a market downturn or when individual companies face tough times, but the best dividend growth stocks manage to raise their dividend payment every year.
Another option is investing in real estate. Real estate can be more involved as it requires sourcing deals and managing tenants. It may also require some maintenance to keep tenants happy and the property in shape. Holding a couple of rental properties in retirement, though, can ensure you have a steady flow of cash coming every month, and rents typically climb with inflation.
Finally, you can buy an annuity. An annuity pays out a certain amount every month for the rest of your life in exchange for a lump sum right now. That provides a lot of stability for retirees, but it doesn't always produce the best returns.
3. Working in retirement
One of the best ways to make sure your nest egg stays safe is to keep working in retirement. Side hustles aren't just for millennials; a small gig can boost both your retirement portfolio and your life span.
Retirement offers an opportunity to explore your passions, and there's almost always a way to turn your passions into profits. Or if you simply want to use the skills you've perfected over your career, you can try your hand at consulting. Thanks to the internet and skills marketplaces, it's easier now than ever to find work doing what you love.
A few thousand dollars in supplemental income every year can be a big boost to retirement portfolio. If you stick to the 4% safe withdrawal rate, every $1,000 in extra income is the equivalent of $25,000 in a portfolio nest egg.
Start planning, stop stressing
If you go into retirement with a plan for how to spend your nest egg or supplement your portfolio, it's far less likely you'll run out of money. Even if you're starting late, you can still make a plan to ensure your nest egg lasts the rest of your lifetime by the time you retire. It might require cutting back or finding a little work in retirement, but at least you won't have to worry.