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3 Reasons You Might Deplete Your Retirement Savings Too Early

By Maurie Backman - Mar 10, 2020 at 7:18AM

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Running out of money as a senior is a frightening notion. Here's how to avoid that fate.

Running out of money during retirement is a major concern. You can do your best to save a bundle in a 401(k) or IRA, only to misjudge your future expenses and wind up cash-strapped down the line. Here are a few reasons why you may be at risk of depleting your nest egg prematurely -- and what to do about them.

1. You don't have enough savings to begin with

It's easy to look at a retirement account with a $300,000 balance and think "Wow, that's a lot of money." But actually, in the grand scheme of retirement, it's not.

You'll generally want to withdraw from your savings at a rate of anywhere from 2% to 5% per year (there are, of course, exceptions to this range, but this is a generally acceptable starting point for the typical retiree), which means that if you have $300,000 in your nest egg, you get $6,000 to $15,000 a year to spend. Even the higher end of that range isn't very much, and while you'll probably collect Social Security as well, based on what the average recipient gets today, that only brings your annual income up to $24,000 to $33,000.

Older man holding his head while reading document, sporting worried expression

IMAGE SOURCE: GETTY IMAGES.

The result? You could wind up needing more money from savings early on and depleting your nest egg midway through retirement, leaving yourself to struggle later on. That's why you should really make an effort to save 10 times your ending salary for your senior years, as many financial experts agree that it's a good way to buy yourself income security for the future. This means that if you're in your 50s earning $100,000 a year, it pays to try retiring with $1 million. Based on the withdrawal rates used earlier, that gives you $20,000 to $50,000 a year from savings, which certainly seems more reasonable than $6,000 to $15,000.

Of course, ramping up your savings won't be easy, but you can do so by cutting back on living expenses while you're working and socking that extra money away. Getting a second job is also a smart move to free up cash for savings.

2. Your savings are invested too conservatively

The 2% to 5% withdrawal rate we just talked about? That assumes your savings continue to generate a reasonable amount of growth during retirement. If you invest too conservatively, that growth will stagnate, thereby increasing your chances of running out of money.

The solution? Don't dump your stocks in retirement; you'll need them to continue generating the growth you want your savings to benefit from. In fact, a 50/50 stock-bond split in your portfolio is generally appropriate. If you're the more conservative type, you can go 60% bonds and 40% stocks, or even 70% bonds and 30% stocks. But don't make the mistake of unloading stocks completely.

3. You don't have long-term care insurance

An estimated 70% of seniors wind up needing some type of long-term care in their lifetime, and the costs involved could be astronomical. Genworth reports that the average home health aide costs $52,624 a year. An assisted living facility, meanwhile, costs $48,612 a year on average, while a nursing home costs $90,155 -- and that's for a shared room.

If you're forced to bear these expenses on your own, you'll likely wind up raiding your savings and struggling after the fact. But if you secure long-term care insurance, you'll have a policy in place to substantially defray these costs should the need for them arise.

You're generally best off applying for long-term care insurance during your 50s. At that stage of life, you're more likely to not only get approved, but get a health-based discount on your premiums. But don't write off the idea of applying in your 60s, especially if your health is good.

Running out of retirement money is a scary thing. Now that you understand what makes that more likely, you can take steps to avoid that fate.

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