Author: Christy Bieber | October 04, 2018
Don't come up short
When you're retired, the last thing you want to do is run out of money. As this will likely happen in your later years, working to make up the shortfall will be all but impossible.
The good news is, there are lots of steps you can take to make your savings last. Some are easier than others, but doing even just a few should help maximize the chances your nest egg will last as long as you do.
1. Invest in the right mix of assets
As a senior, you know you need to invest more conservatively because you don't have time to weather market downturns. But, that doesn't mean moving all your money to bonds that barely keep pace with inflation. Your asset allocation needs to be carefully calibrated to achieve the right mix of risk and returns if you don't want to go broke.
Say, for example, you have $350,000 saved and need $2,000 in monthly income from your retirement plan to supplement Social Security. If you earn an annual rate of return of just 3%, your money would run out in 14 years, assuming a 3% inflation rate. If you'd retired at 65, you'd be just 79.
If you earned a little bit more -- 5% -- you'd be good for 17 years until 82, which still might not be long enough. But, if you were able to earn 8%, you'd be set for 25 years or until 90. That's a lot better than running out of cash more than a decade earlier.
While it can be hard to figure out how to appropriately allocate your assets, there's a simple trick to try. Subtract your age from 110 to determine the percentage of your portfolio that should be in stocks. With this approach, you'd have 40% of your portfolio invested in the market at age 70.
2. Limit your withdrawals to a safe rate
When you reach retirement age, you'll have to start taking money out of your retirement accounts. The single best way to make sure your money lasts as long as you need is to limit withdrawals. Of course, that means you need to decide what limit to impose.
The safest approach is to live off interest and leave the principal invested. You'd leave a large nest egg to your kids with this approach -- but it's not practical for most because it provides too little income to live comfortably.
If you need to withdraw some of the principal, you can use a percentage-based rule to cap the amount you take out. Traditionally, experts suggested you'd be in pretty good shape if you took out 4% of your invested funds. This was called the 4% rule. But studies have shown if you follow the 4% rule today, there's a good chance you'll run out of cash.
Instead, a better approach may be to use Required Minimum Distribution tables prepared by the IRS to decide what percentage of your account to withdraw annually. You can find out more about how and why this approach works in this article.
3. Consider part-time work
To make your retirement savings last, it's helpful to have income from other sources.
One of the best sources is a part-time job. If you can find work you enjoy doing, your job will also help you stay mentally sharp and maintain social connections. And, if you make enough, you may even be able to add to the nest egg you have for the future, rather than drawing down your assets.
The only caveat is that working could reduce Social Security benefits if you've claimed them already and are under full retirement age. The good news is, you don't lose these benefits forever -- you just get more money later. That helps you both because you're bringing in more income now and boosting future retirement income by raising your Social Security benefits.
4. Maximize your Social Security income
Speaking of Social Security, the more money you get from it, the less you'll need to withdraw from your savings to support you.
To boost your Social Security income, you can delay claiming benefits until age 70. You'll earn delayed retirement credits, which boost the monthly income you receive for the rest of your life.
Of course, you do need to factor in years of missed benefits if you wait. And, if you draw down your savings faster during the years before you claim Social Security, this could lead to money running out sooner. Still, Stanford experts ran 292 scenarios and found that delaying until age 70 was best.
You should also coordinate with your spouse about claiming benefits, as it may make sense for the higher earner to wait to claim as long as possible. This would maximize the higher earner's benefits during his or her life and ensure the highest possible widow or widower's benefit when one of the spouses passes away.
5. Move to a state that won't tax your retirement income
When you're a senior trying to make your money last, giving the government a piece of it can be painful.
The good news is, there are some states where you can avoid taxes on your Social Security benefits and even avoid taxes on pension income. In fact, there are 37 states that don't tax Social Security and a dozen others where at least some pension income is exempt from taxation.
While you'll owe federal taxes on a portion of your Social Security benefits if your income exceeds a certain threshold, avoiding state taxes could give leave you with significantly more cash -- which in turn means taking less out of your retirement accounts.
6. Live off a budget
When you're careful with where your cash goes, you can take less out of your retirement savings and may even be able to put more money in the bank for the future. The best way to be careful about spending is to live off a budget.
Making a detailed budget not only allows you to live within your means, but you can also make sure your hard-earned dollars are being used for things that provide the most value. To make your budget, start by tracking your spending to see where your cash is going -- then make adjustments to avoid overspending and live within your means.
7. Get the right healthcare coverage
Healthcare is one of the single biggest expenses seniors have, and high care costs can destroy your financial security. You should plan early for how to cover healthcare costs, which may include opening a health savings account (HSA) and investing in it throughout your working life.
Of course, once you reach retirement, it's harder to put aside a lot of cash for care. What you should do, though, is make certain you have the right coverage for your needs. For most seniors, buying a Medigap or Medicare Advantage plan is important to cover things Medicare doesn't.
Seniors have a 20% coinsurance cost for routine care under Medicare Part B, so not having supplementary coverage could leave you with really huge bills if something happens. Shop during Medicare open enrollment to compare plans and see which one meets your needs.
8. Take advantage of senior discounts
One of the great things about getting older is that many businesses provide discounts to seniors. To benefit from these breaks, always ask if you're eligible for a reduced price when you book travel or visit attractions. You may also want to join the AARP, as members are often entitled to lower priced insurance and other products.
Calling your car insurer is also a good idea. When you've retired and are driving less, your insurance premiums may drop if you let your insurer know.
9. Maintain a separate emergency fund
Emergencies don't stop when you're a senior and the last thing you want is to be forced to withdraw a lot of money from your retirement accounts to cope with a financial catastrophe. Instead, have an emergency fund to draw from in case disaster strikes.
Ideally, you should save an emergency fund with around three to six months of living expenses before you retire. Once you've left work, if you spend the money, you'll need to replace it. You can do this by adjusting your budget to divert some monthly income towards savings. This may mean skimping on other things for a few months, such as avoiding eating out -- but it's worth it so you won't have to drain your retirement savings if a setback occurs.
10. Avoid going into debt
Debt is a disaster when you're a senior. Any money going towards interest is cash you can't use. Paying interest makes every purchase more expensive, which means taking more out of retirement accounts to fund your lifestyle.
Interest on most debts will far exceed investment returns, and if you withdraw money from retirement accounts to pay interest, you'll lose the chance to keep that cash invested and growing.
Having an emergency fund helps you avoid debt, and you should also plan to save for big purchases in your budget so you don't have to finance them.
11. Drive your cars for longer
Cars are a huge expense, with the average loan on a new car carrying a $523 monthly payment as of 2018.
If you buy a new car regularly, you'll be stuck with a car loan for the rest of your life, which means taking more money out of retirement savings to fund the loan.
If you drive your car for longer, you can pay off the loan and keep making “car payments,” by putting money you were paying on the loan into savings. Then, keep your old car long enough to save up enough to buy a new one in cash to avoid wasting precious retirement funds paying interest to auto lenders.
12. Consider long-term care insurance
If you need to spend even a small amount of time in a nursing home, chances are good you'll end up eating through your retirement savings very quickly. That's because the median cost of a semi-private room in a nursing home was $7,148 monthly as of 2017.
Long-term care insurance can pay for care so you don't go broke. Not every long-term care insurance policy is a good one -- some have limits that make them impractical -- but if you shop around and buy coverage when you're relatively young, you should be able to find a policy you can afford that will keep you from spending all of your retirement cash on a facility.
13. Cut off your kids
Close to 75% of parents still provide help to adult children. While it may be hard to tell your offspring you're closing the Bank of Mom and Dad, it's vital to protect your own future.
Your kids have their whole lives to work, earn income, and save -- but once you're retired you won't have the chance to rebuild your investments if you spend money too quickly helping out your children. It won't do you or your kids any good if you end up broke at 80 because you've been too generous, so practice some tough love now and just say no.
14. Downsize to a smaller home
When you're paying a mortgage, you need a much higher monthly income. One of the best ways to make your retirement savings last is to get rid of the mortgage expense by selling your current home and downsizing to a smaller one you can buy outright.
If you owe too much on your home to pay cash for a new one, downsizing is still beneficial to reduce your mortgage payment.
And, if your home is paid off, downsizing still makes sense because a cheaper home usually means lower taxes, reduced utility costs, and less money spent on upkeep. Plus, if you downsize and buy a cheaper house, you can invest the extra money your home sale brings in.
15. Determine if an annuity is right for you
If you want to make absolutely sure your retirement income lasts, you could consider the purchase of an annuity.
There are different kinds of annuities and there are big downsides to most of them -- including high commission and fees. But, the upside is that when you've purchased a fixed annuity, you'll have a predictable income steam. Just be sure to shop around carefully, do your research, and choose a trusted insurer if you decide to go this route.
Making your retirement savings last is essential
By capping the amount you withdraw from retirement savings and living on a budget, you can leave enough money invested so you don't outlive your savings. While this may sound daunting, you're much better off being careful with your cash throughout retirement than running out of money in your 80s.
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