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3 Things You Must Do If You're Worried About Running Out of Money in Retirement

By Maurie Backman - Feb 13, 2021 at 6:18AM

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Scared you'll deplete your nest egg? Here's your solution.

From a financial standpoint, retirement can be a pretty daunting prospect. After all, when you're used to working and collecting a paycheck, the idea of cutting off that income stream and relying heavily on savings may be enough to cause you some stress. After all, savings do, in time, have the potential to run out, so if that's something you're worried about, here are three important moves to make.

1. Boost your IRA or 401(k) contributions

The more money you bring with you into retirement, the less likely you'll be to run out down the line. As a general rule, it's wise to close out your career with about 10 times your ending salary socked away in a retirement plan, so if you have some work to do in that regard, now's the time to increase your savings rate.

If you're at least 50 years old, you can make annual catch-up contributions in your retirement plan -- $1,000 for an IRA and $6,500 for a 401(k). Taking advantage of those will help you end your time in the workforce with a more comforting sum.

Middle-aged man with serious expression at laptop

Image source: Getty Images.

2. Invest your savings wisely during retirement

Once you retire, you'll need your IRA or 401(k) to continue generating growth. And a smart investment strategy can make that happen. You'll often hear that it pays to favor safer investments, like bonds, during retirement, but in reality, you'll still need a sizable chunk of your savings in stocks to generate more growth.

The extent to which you divvy up your retirement-plan investments will depend largely on your age and appetite for risk. If you have a moderate risk tolerance and you're retiring in your late 60s, you may decide to keep about 45% to 50% of your assets in stocks initially, and the rest in bonds. The bond portion of your savings will generate lower returns most likely, but you may also benefit from regular interest payments that provide some stability.

3. Have a well-thought-out withdrawal strategy

Dipping into your retirement plan randomly is a good way to deplete it sooner than you'd like. Rather, you should come up with a withdrawal strategy before retirement.

For years, financial experts have talked up the 4% rule, which states that if you remove 4% of your savings balance your first year of retirement and then adjust subsequent withdrawals for inflation, your savings should last 30 years. The rule is a bit outdated at this point, mostly because it makes certain assumptions that don't apply to market conditions today. For example, back when the rule was established, bonds were a more lucrative income stream than they are today due to higher rates. As such, while you shouldn't necessarily adopt the 4% rule, you can use it as a starting point.

If you're retiring in your late 60s, you may decide to begin by withdrawing 3% of your savings balance and seeing where that takes you. Then, based on how your investments perform and your personal needs, you can adjust that percentage as you go.

Running out of money in retirement is a legitimate fear, but there are steps you can take to reduce the risk of that happening. Remember, too, that if you delay your Social Security benefits as long as possible, you'll score a higher monthly payout in the process -- for life. And while you shouldn't rely on Social Security too heavily, growing your benefits is just one other way to put less pressure on your savings -- and yourself.

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