By Dr. James M. Dahle, WCI Founder
One of the greatest fears of many investors and retirees is that they will run out of money in retirement. However, there are many strategies available to ensure this doesn't happen to you. By employing one or more of these, you can dramatically decrease those odds.
8 Ways to Ensure You Don't Run Out of Money in Retirement
The greatest financial task of your life is to save up enough money for retirement. However, some people don't quite make it. Or barely make it. Or have bad things happen to them. In spite of that, there are at least eight strategies that will still allow you to avoid running out of money. Choose one or more to apply in your life.
#1 Save More
This strategy is employed by many. The 4% “rule” suggests you save up about 25X your annual spending before retiring. However, there is no law that says you can't save up 30X, 33X, 40X, or even 50X. Obviously the more you have in relation to how much you spend, the less likely you are to run out of money.
#2 Spend Less (at Least Sometimes)
Here's another great strategy that works very well. Instead of saving more, you can simply spend less. Maybe you were planning to spend $100,000 per year in retirement, but if you can manage to spend just $80,000, you are far less likely to run out of money. You can do this by downsizing or by moving to a lower cost of living area, or you can adjust how often you go out to eat, where you go on vacation, or what you drive in retirement. Lots of options. But you don't actually have to spend less ALL the time. You really only have to spend less when your portfolio is doing poorly. This “variable withdrawal strategy” dramatically increases how much you can spend overall, even if it means sometimes you have to spend a little less. Having spending flexibility in retirement is very valuable.
#3 Only Spend Income
If you never actually touch your principal, you will never run out of money. That doesn't mean your nest egg, your income, and your spending will be stable or that it will even keep up with inflation, but it does mean you won't run out completely. Yet, this strategy can lead to potential errors. Perhaps the greatest is that you'll end up spending much less than you could have spent—to some people, that just means they worked too long and saved too much. It can also lead someone to inappropriately invest in a high-yielding portfolio. Just because your income is higher doesn't mean your total return is higher or even positive. Often it leads people to work and invest differently. They might be more interested in entrepreneurship and both direct and indirect real estate investing, for instance. Nothing wrong with that, but it does require a different set of skills and adds some risk, hassle, and (often) leverage.
#4 Spend Your Legacy
Many of us would love to leave some money and assets behind to heirs and our favorite charities. However, it's not imperative. Certainly, you don't want to eat Alpo to leave behind a massive legacy. There are several ways to dive into your “legacy money” to support your lifestyle. For instance, if you have a cash value life insurance policy, you could do a partial surrender, borrow against it, (1035) convert it to an immediate annuity, or completely surrender it and then spend that money. Likewise, if you have a paid-off house, you could sell it, take out a mortgage on it, or even buy a reverse mortgage.
I'm not a big fan of either whole life insurance or reverse mortgages (lots of costs and downsides there), but I'm not a big fan of running out of money either. You can sell or borrow against second homes, cars, boats, airplanes, and anything else you were planning to leave to heirs, too. Sometimes you can have (part of) your cake and eat it, too. Let's say you want to leave a bunch of money to charity. But you are also worried about running out of money. You could get a Charitable Remainder Trust. You get a charitable deduction for funding this (which allows you to spend money that would have gone to taxes), you get annuity-like payments for years from it, and the charity gets the “remainder” when you die.
You can take this idea of spending your legacy even further, and many people do. They want their last check to bounce! Why just spend everything you have when you can spend everything you have and everything you can possibly borrow? Remember debts that are only in your name go away at death if your estate has no value. (Yes, I think this is immoral. No, I'm not seriously recommending it; don't send me hate mail. But let's be honest, lots of people do this with everything from credit cards to medical bills to auto loans to IRS debts to student loans.)
#5 Earn Money in Retirement
Your nest egg lasts a lot longer if you maintain earned income at any level after you retire. While the Internet Retirement Police might argue that you're not actually retired, you're not trying to please them. Maybe this is a little Etsy business or a blog. Maybe it's an encore career. Maybe it's just an Airbnb of your mother-in-law apartment in the basement. Doesn't matter, it all works the same to keep you from running out of money.
I suppose another strategy is to simply work longer before retiring at all. That allows you to make more contributions, gives your investments more time to compound, and makes your Social Security benefit larger.
#6 Delay Social Security
Delaying Social Security from age 62 to age 70 can dramatically increase your Social Security payments. Most healthy single people should delay for a very simple argument—if you die early, it doesn't matter what you do, and if you die later, you'll be very glad you waited to claim. It will certainly help you avoid running out of money to have a higher guaranteed income. Financially speaking, delaying Social Security is a much better “deal” than the next two options, especially when you consider it is indexed to inflation.
#7 Get a Pension
If this is a big concern of yours, you may be working for an organization that offers some sort of pension, such as a government or military employer. But even if you never earned a pension, you can still buy one. These are called Single Premium Immediate Annuities (SPIAs), and you can buy them from many insurance companies. While it is difficult to get an inflation-indexed SPIA these days, buying one or more in your 60s can still be a great way to put a floor under your income and “give you permission” to spend your money, since you know there will be more coming the next month.
#8 Buy Longevity Insurance
“Longevity Insurance” is a similar product. It's an annuity, but instead of issuing you monthly payments as soon as you buy it, it delays those monthly payments, sometimes for a long time. For instance, you might buy an annuity at age 70 that does not start paying until age 90. However, since plenty of 70-year-olds who buy this product die before 90 and because the insurance company has 20 years to invest your money, it pays out A LOT of money starting at age 90. That “gives you permission” to blow through a lot more of your assets between 70 and 90 than you otherwise could. You know you won't be hosed if you live to 98 because starting at 90, you have another source of substantial income. There is some data that people who buy annuities live longer, too. While no one doubts that incentives matter, correlation is not causation. Maybe those who are more likely to live longer are just more likely to bet that way.
As you can see, there are at least eight methods you can use to ensure you do not run out of money in retirement. Track things carefully, and if it appears you are on an unsustainable pathway, employ one or more of these methods to fix the issue.
What do you think? What are the best ways to make sure you don't run out of money in retirement? Would you rather spend less or earn more? Comment below!