What Happens if You Have Too Little Money in Your Brokerage Firm as a Retiree?

When you retire, you'll likely need to rely on distributions from retirement accounts like a 401(k) or an IRA held at a brokerage firm.

But what happens if you don't have enough money in these accounts when the time comes to leave the workforce? There are a few scenarios you could face.

You could drain your account

One huge risk of not having enough money in your retirement accounts is that you might run out of money entirely.

See, you need to maintain a safe withdrawal rate. You can't take out more than around 4% of your account balance each year or your balance will fall too quickly, you'll no longer earn the returns that you need, and you may find yourself looking at a $0 balance.

Let's say, for example, that you have $200,000 in total in your brokerage accounts and you need your accounts to produce $20,000 in income to supplement your Social Security the first year of retirement and will adjust your withdrawals upward by 2% each year to account for inflation. If you earned an average annual return of 6.00%, your money would last about 12 years before it ran out entirely, assuming you were in the 22% tax bracket.

There is a very good chance that you will live longer than 12 years after you retire. If you did, you would be looking at empty retirement accounts that would no longer provide any support to you.

You could end up having to drastically reduce your standard of living

Having too little money in your brokerage account as a retiree could mean that you must live on far less than you're comfortable with.

Social Security benefits are designed to replace about 40% of pre-retirement income, and that's just not going to cut it for most people. If you were making $60,000 and you ended up with just about $24,000 to live on after leaving work, that would be a huge adjustment, and chances are good you wouldn't be able to continue covering your rent or mortgage along with all the other bills you'd have to pay.

If you took enough money out of the limited funds in your IRA to cover the shortfall and replace another 40% or so of your pre-retirement earnings (since most experts recommend about an 80% replacement rate), then you'd risk running out of money too soon and having nothing at all left. And if you didn't take enough out of your accounts to do that, then you'd struggle to have enough money over time.

So, basically, you'd be facing the choice of whether to have too little money throughout your entire retirement, or to live comfortably for a few years and then end up with no extra funds to supplement Social Security. Neither of those are good outcomes.

What can you do?

You don't want to find yourself with too little money in your brokerage accounts or 401(k) when your time to retire arrives. Be sure to set a detailed savings goal by assuming you need to end up with an investment account balance equal to about 10 times your final salary.

Once you know how much you'll need to invest, estimate projected future returns (around 10% is reasonable), and your timeline for how long you have until retirement. You can then use a Savings Goal calculator like the one on investor.gov to figure out exactly how much to invest each month so you don't end up with too little. Make sure you're putting this money into an investment account every month as it's far better to sacrifice a little to do that now than be forced to make uncomfortable sacrifices as a retiree.