How to Avoid Going Broke in Retirement

Source: iStock
Source: iStock

Retirement is generally supposed to be a time to wind down and enjoy life. Unfortunately, the possibility of running out of cash can make this time of your life extremely stressful. However, with appropriate planning you can reduce your chances of living on the financial edge. Here are three ways to make sure you don’t run out of money.

1. Set a realistic budget

Certified Financial Planner Pamela J. Horack of Pathfinder Planning says it’s important to get a clear picture when it comes to future expenses. Take time to review your finances and take into account any new expenses that may come up.

“Your transportation and dry cleaning bills may decrease, but if you take up golf, gardening or another hobby, your new expenses may offset any savings. Do you plan to dine out more with friends? Or travel to see the grandchildren? Be sure to factor in these new expenses and certainly consider health care costs. Once you have some realistic numbers, stretch them out over your life expectancy. It is likely your budget will change each year based on your circumstances,” said Horack.

2. Decide on a withdrawal rate that’s right for you

While it’s important to withdraw conservatively, know there is no particular rate that will satisfy every situation. Despite some experts saying there is a “magic number” when it comes to withdrawals during retirement, there isn’t a specific percentage that can be set across the board.

“The 4% withdrawal amount has been tossed around for many years. I don’t believe it’s that cut and dried, as each individual has different retirement needs. Consider retirement as a three-legged stool of Social Security, pensions or annuities, and your personal savings. Once you know how much the first two will grant you in income, you can work with a certified financial planner to help determine the withdrawal amount that is appropriate for your budget. Again, your income may change each year, depending on your circumstances,” said Horack.

Source: iStock
Source: iStock

Certified Financial Planner Jennifer Harper, founder and director of Common Cents Financial Literacy, agrees with Horack’s assessment. “The most often quoted ‘4% rule’ was originally published in 1994 by William P. Bengen. Then in 1998 there was the Trinity Study that built upon Bengen’s work.  As is sometimes the case, the sound bite gets the attention. These studies were never intended to be taken at face value for every retirement income scenario,” said Harper.

Get an estimate of how long you can expect your money to last at different withdrawal rates.  You can do this by utilizing retirement calculators. Mutual of Omaha and Vanguard feature withdrawal calculators on their sites.

3. Have a backup plan if you overdraw

While setting a realistic budget and withdrawing conservatively are good plans, there’s no way to tell if your budget or withdrawal rate will go without a hitch in the long-run. Unexpected circumstances can — and often do — crop up, so it would be wise to have a plan B in the event your primary plan fails and you come close to spending most of your retirement nest egg.

“As is always the case, if anyone is short on cash, there are really only two options: spend less or make more. This is deceptively simple, but difficult,” said Harper. “The best advice I have here is to watch the smaller expenses. Most people don’t pay attention to how the smaller expenses can add up,” Harper continued.

Harper also recommends getting a second job to help bridge the financial gap. Roughly 47% of retirees say they have worked or have plan to work during retirement. Furthermore, approximately 72% of pre-retirees age 50 and over say they want to keep working after retirement, according a Merrill Lynch retirement study.
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