In a recent study conducted by Bay Alarm Medical, more than 1,000 people were asked to name their biggest fears associated with getting older. Surprisingly, the top three fears didn't include either their own death nor the death of a spouse.
Instead, financial instability was near the top of the list, with eight in 10 Americans indicating they were seriously worried about running out of money as they got older. The only things feared more than financial instability were dementia or mental regression, death of a child, and loss of mobility.
While worrying about money may be a national pastime for seniors, it doesn't have to be. There are ways to overcome money worries, even as a current retiree.
How to stop worrying about money as a senior
If you're already retired, the best way to stop worrying about running out of money is to make a plan to ensure you don't.
This means, first and foremost, deciding how much you can live on during your golden years. This money can come from Social Security and employer-provided defined benefit pensions, both of which are typically fixed sources of income. It can also come from savings, which is the part where things get tricky.
When you have a nest egg you want to protect, you need to decide how much of it you can afford to withdraw each year, at maximum. There are a number of ways to do that, including:
- Follow a percentage-based rule: The 4% rule says you can withdraw 4% during your first year of retirement and increase withdrawals by inflation in each year thereafter. However, this approach may not work in a low-rate environment, and it could leave you exactly where you don't want to be: out of cash. If you want a percentage basis, consider a 2.5% to 3% rule instead.
- Use IRS required minimum distribution (RMD) tables: RMD tables specify required withdrawals from tax-advantaged retirement accounts. Tables specify withdrawals based on life expectancy, and while RMD tables start at 70, Center for Retirement Research (CRR) did the math to go back to age 65. Using RMD tables, you can find what percentage of your account you can withdraw at each age. CRR found the RMD method performs better than the 4% rule by incorporating uncertain returns. RMD tables also allow consumption to rise with age, which is important because healthcare costs often go up.
- Spend your interest only: This is the safest approach, and it involves leaving your principal balance alone and only withdrawing money made from interest and dividends each year.
Choose the most conservative of these methods you feel you'd be able to live on -- and make a commitment not to withdraw more.
If this doesn't put your mind at ease because you're still worried you'll run out of cash even when you withdraw at safe levels, you may want to look into purchasing an annuity from a trusted insurer that will provide guaranteed income for life.
Set a budget you can live by
To ensure you stick to your commitment not to withdraw more from savings than you should, set a detailed budget factoring in where you live; what you'll spend on food, utilities, and other vital expenses; what you'll save; and what you'll spend on optional expenses such as travel and hobbies.
Don't forget to include saving in your budget. You can, and should, save for big purchases, new cars, home repairs, and emergencies so you don't have to go into debt to pay for these costs. And if you're already in debt, prioritize debt repayment as part of your budget plan. The sooner you can get clear of debt and stop paying interest, the more of your money you can use to enjoy your life.
Finally, make sure to budget to pay for the most comprehensive supplementary Medicare policy you can find, as healthcare costs are a big reason seniors get into financial trouble.
If you can't make the budget numbers work when you make a comprehensive budget and compare it to your income, including Social Security and conservative withdrawals from investments, look for big ways to cut expenses, such as moving to a cheaper home or area. Alternatively, you could increase income by taking a part time job.
Keep making the necessary changes, either by cutting costs or increasing income, until your safe income level matches up with your outflow.
Ending your money worries is as simple as making a plan
Once your income -- with a safe level of withdrawal -- is matched to your spending, you won't have to worry about running out of cash as a senior. When you budget for necessities and for fun, you can spend without guilt or worry and know you've left enough in the bank to see you through.