There’s plenty of retirement advice out there recommending how to save money for retirement and how much you will need, but there’s relatively little information about where to spend money and how you can spend each year once you retire. Since most people start with a large sum of money, it can be challenging to know how long it will last and whether it’s enough to support you throughout retirement.
Let’s take a look at five signs that you may be at risk of running out of money in retirement and how you can make a move to protect yourself now.
#1. You Don’t Have a Budget
Most people fail to appreciate that how you spend is arguably more important than how much you save. In fact, by the time you retire, how much you spend is the only variable that you can control without a part-time job or other means of increasing your income. And budgeting is the key to effectively controlling that variable during your retirement years.
Start by calculating how much you have saved for retirement and your income from Social Security, pensions and other sources. With that figure in mind, you can calculate how much you can draw down each year in retirement using a wide range of different techniques. This is a baseline that you can use when creating a monthly budget.
The easiest way to actually create a monthly budget is to gather your past expenses from bank statements, credit card statements and other sources, and compute your monthly spend. You can compare these monthly expenditures to your anticipated retirement income to identify and address any potential shortfalls.
Be cautious of large “one-time” expenses. It is easy to think of expenses as unusual and not plan for them again in the future, but too often, we see our clients repeatedly have unexpected expenses. It may be a once-in-a-lifetime vacation or a simple home improvement project, but these big ticket items can permanently impact the earning power of your portfolio.
You should then look at ways to reduce your monthly spending or increase your monthly income if there’s a shortfall. For example, you may be able to substitute a Netflix subscription for your cable bill or reduce your weekly budget for dining out or entertainment. Or, you may consider taking a part-time job to provide extra income.
#2. You Have a Lot of Debt
Median total consumer debt for 65+ households is more than $30,000 while more than 60% of 65+ households carry debt in retirement, according to Forbes. These debts can consume monthly cash flow and make it difficult or impossible to afford retirement. Even worse, they can limit your options to access more cash flow if you need it.
If you’re still working, you may want to prioritize paying off debt prior to retirement, particularly things like credit card and student loan debt. These efforts will help free up monthly cash flow and enable you to access more credit in the future if you need it. It’s one of the most important ways to ensure that you can comfortably retire and it’s often worth working a little extra to start off on the right foot. Reducing debt helps two-fold: You eliminate a monthly expense and learn to live on a less expensive budget.
If you’re already retired, you may want to try reducing your monthly expenses or taking on a part-time job to prioritize paying off debt. These efforts may be painful in the short-term, but it can help free up cash flow in the future when it may be critical. You can also look for ways to eliminate debt through refinancing or sales — including downsizing your home.
The average retiree’s largest debt is their home mortgage. In some cases, it might make sense to downsize your home in order to afford retirement and even reduce your home maintenance and associated costs. The windfall from these transactions can also be used to pay off other debt and pad your monthly budget.
#3. You Made Ambitious Assumptions
Most people have heard that “stocks return about eight percent per year over the long-term”, but those aren’t assumptions that anyone should be making for their retirement portfolios — particularly if they’re close to retirement. In fact, most people approaching retirement hold relatively low-yielding bonds rather than high-growth stocks.
In addition, current economic circumstances may influence performance over a period of several years. A recession could depress the return estimates over the course of one to three years, which represents a significant portion of a retiree’s investment horizon. You should account for these circumstances in your retirement plan.
The best assumptions are conservative enough to apply to most markets without leaving too much money on the table. For example, the Four Percent Rule assumes that you’ll have a long-term four percent return, which means that you can assume a four percent yearly withdrawal rate on your portfolio — although even that may not be conservative enough!
#4. You Don’t Have an Emergency Fund
Emergencies are costly to retirees for several reasons: They live on a fixed income, high withdrawals can trigger high taxes, and unexpected withdrawals can throw off their retirement plans. Emergency funds can help prevent these problems from derailing your retirement, but there are also other actions that you can take to avoid the same problems.
The best way to address unexpected, but still predictable, “emergencies” is to budget for them. For example, it’s no secret that you may need a new water heater or roof work done every decade. You should plan on saving for these high costs in your monthly budget, which can reduce the need for sudden large withdrawals.
Another way to prevent emergencies from derailing your retirement is to purchase adequate insurance to cover large expenses. For example, homeowner’s insurance with a low deductible can alleviate unexpected housing costs, while supplemental medical insurance can help reduce the cost of medical procedures or prescriptions.
In addition, you should have an emergency fund set aside for true emergencies, such as an unexpected emergency room visit or a sudden hail storm. The amount in the fund varies from person to person, but it’s a good idea to set aside at least three months of expenses in cash to handle these unexpected circumstances.
#5. You Rely Too Much on Others
Is an inheritance a critical piece of your retirement plan? Have you already ear-marked money from mom and dad to pay off the house or eliminate credit card debt? With most people living longer and longer, these may not come as soon as you expect. Also, with the highest cost of assisted living and nursing homes, large portfolios can be spent in the final years prior to death.
You should have enough set aside in your own individual retirement account or 401(k) to finance your basic needs. Any extra income from Social Security or pensions can be used to offset expenses and provide padding for your budget.
The Bottom Line
Retirement is a time that should be enjoyed to its fullest — not a time spent worrying about money. By keeping these warning signs in mind, you can avoid running out of money in retirement and ensure that you have enough income.
The Snider Investment Method is a long-term strategy designed to create income from your portfolio and ensure cash flow in retirement. Using a combination of stock, options and cash, along with specific techniques applied in a specific sequence, can help maximize your portfolio’s income potential without resorting to fixed income investments.
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