Saving for retirement isn't easy. To build up a nice balance in an individual retirement account (IRA) or 401(k), you may need to make sacrifices, like working a demanding job or forgoing certain luxuries such as nice vacations. But if you're able to kick off retirement with a sizable IRA or 401(k) plan balance, you can enjoy not only more peace of mind but also a more comfortable lifestyle.
Even if you bring a nice amount of savings into retirement, though, there's no guarantee that your money won't run out. It's a fear a lot of people have, and understandably so. Here are three factors that could lead to your IRA or 401(k) getting depleted -- and what to do about each.
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1. Longevity
Americans are living longer these days. That's a good thing, in theory, but it could be a challenging thing in the context of preserving your nest egg.
One way to address that challenge is to be strategic with your withdrawal rate. You may not want to stick to the classic 4% rule, especially if your portfolio is invested more conservatively. A smaller withdrawal rate, like 3%, may be more appropriate, depending on your portfolio composition.
Another way to address longevity risk is to set yourself up with more guaranteed income outside of your portfolio. One option is to delay your Social Security claim past full retirement age. For each year you wait beyond that point, up until age 70, your monthly benefits get an 8% boost. And the more money Social Security pays you each month, the less money you should have to withdraw from your savings.
2. Market declines
A stock market decline, especially early in retirement, could put you at risk of eventually running out of savings. If you're forced to sell investments at a loss, it could put you in a position to eventually deplete your funds, especially if that happens repeatedly.
The solution? Always have an extensive cash reserve as a retiree. A good rule of thumb is to have two years' worth of living expenses in cash. That gives you time to ride out stock market downturns.
Another important thing to do is to diversify your portfolio. Don't go all-in on growth stocks as a retiree, as those may be likely to lose the most value during a market decline. Throw some dividend stocks into the mix. Those may be more stable, and the dividend income you receive could help offset other losses in your portfolio.
3. Rising healthcare costs
Healthcare expenses tend to eat up a lot of retirees' budgets. They also have a tendency to rise over time and at a faster pace than inflation broadly. Expensive healthcare bills could erode your savings and put you at risk of running out, so it's important to have a plan.
One important thing to do is to choose your Medicare coverage wisely and review your plan choices each year during fall open enrollment. Another thing you may want to do is save separately for healthcare expenses in a health savings account. If you have a dedicated pool of funds for medical bills, you may not need to tap your retirement plan every time you have to pay for healthcare.
Also, if you decide to stick with original Medicare for coverage, as opposed to Medicare Advantage, look at buying supplemental insurance (Medigap) early on. Doing so could make it possible to lock in more affordable premiums. If you have Medigap, it could help cover the cost of deductibles, coinsurance, and other large costs that could chip away at your nest egg over time.
It's natural to worry about running out of money as a retiree. But if you address each of these factors strategically, you can mitigate that concern and give yourself one less thing to worry about.
