Americans are living longer than ever, with an average life expectancy of around 85 years, according to the Social Security Administration. Furthermore, one-third of today's retirees can expect to live past age 90, and one in seven will likely live past age 95.
This is great news for most retirees -- after all, who doesn't want to spend as much time as possible in retirement? However, it's not-so-great news for those who don't have a rock-solid nest egg.
More time in retirement means your savings have to last longer, and there's a good chance most retirees will run out of money at some point. In fact, the average American is expected to outlive their savings by around 8 to 10 years, a study by the World Economic Forum found.
The problem is that while many Americans know this is a potential risk they'll face in retirement, they aren't doing anything to prepare for it. Nearly half (45%) of Americans admit that it's likely they'll outlive their savings, according to a report from Northwestern Mutual, with 11% even saying there's a 100% chance they'll run out of money. And yet 41% of people also say they haven't taken any steps to limit their risk of outliving their savings.
What happens if you run out of money in retirement?
If your savings run dry during retirement, you'll likely be left to rely on Social Security benefits to make ends meet. However, the average benefit amount is just $1,400 per month, so that may not be enough to cover all your expenses. Even if you can get by on Social Security alone, you may not be able to afford the opportunity to live the retirement lifestyle you're hoping for.
The average person over the age of 65 spends nearly $46,000 per year, or around $3,800 per month, according to the U.S. Bureau of Labor Statistics. If you're used to spending that much each month and then have to start surviving on Social Security benefits, you'll need to make some drastic budget cuts. At the very least, you may no longer be able to take vacations or eat out at restaurants. But if you need to make more serious changes, you might have to downsize to a less expensive home or sell your car.
You may also be hoping you can just pick up a part-time job in retirement if you run out of money. It's never a bad idea to find ways to increase your income, and if you can continue working in retirement, that's a good way to build up your savings. However, there's no guarantee that you'll be able to find work after you retire -- especially as you get older.
Preventative measures to avoid outliving your savings
Nobody knows exactly how long they'll live or how long their money will last, but if you're concerned you may outlive your savings, the easiest way to avoid that risk is to take preventative measures. It's much easier to boost your savings while you're still working than to try to do so after you retire, when you're living on a fixed income.
First, give your finances a checkup to see how your savings stand. By using the 4% rule, you can get an idea of how much you can safely withdraw each year in order to make your savings last. This guideline says that if you withdraw 4% of your savings the first year of retirement and then adjust the amount you withdraw each year afterward for inflation, your money should last around 30 years. So if you expect to have, say, $250,000 saved by retirement age, according to the 4% rule, you can only safely withdraw $10,000 each year if you want your money to last several decades.
To figure out how much you should be saving, an easy way to get a rough estimate is to use a retirement calculator. Many calculators will also tell you how much you should be saving each month to reach your goal, making it easy to see whether you're on track.
If you know your current savings aren't going to be enough, start making budget cuts now to boost your nest egg. Making sacrifices now may not be ideal, but it is better than the alternative of running out of money in retirement and being forced to make major lifestyle changes just to make ends meet.
Sometimes, saving just an extra couple hundred dollars every month can make a significant difference -- especially if you still have a couple decades left before retirement and your investments have plenty of time to grow. Take a fine-tooth comb to your budget to eliminate any unnecessary expenses, then put those savings toward your retirement fund. If you've made all the cuts you can and it's still not enough, consider picking up a side hustle and putting all your earnings toward your savings. Keep your focus on your end goal, and just remember that the sacrifices you're making now will be worth it down the road.
Nobody wants to think about running out of money in retirement, but unless your savings are in tip-top shape, it's a reality you may have to face. Fortunately, if you take action early and save as much as you can before you retire, you'll be able to enjoy your golden years to the fullest.