How to protect yourself from running out of money when you retire

If you fear running out of money in retirement, you’re in good company.

The most frequently cited retirement fear for workers is outliving their savings and investments (42%), according to the 21st Annual Transamerica Retirement Survey of Workers, “A Compendium of Findings About the Retirement Outlook of US Workers,” from November 2021.

Rather than lose sleep over this or try to ignore the subject, figure out a plan. The goal is to determine how much money you can safely spend down each year in retirement, if necessary.

How much can you safely spend down per year in retirement? It depends on many factors including:

· Potential for longevity

· How well you have saved and invested

· How long you worked or how long you plan to work

· When you claimed or plan to claim Social Security retirement benefits

· The lifestyle you want to live during your retirement years

A reasonable starting point is to consider how long you might live, and consequently, how long your retirement might stretch – 20, 30 or more years? Armed with this approximation, you might be less (or more) likely to pick up and leave your job, and your paycheck, or close your business or practice without careful planning.

Consider the statistics: On average, men and women who live to 65 are expected to live, on average, to 84.3 for men, and 86.6, for women, according to the Social Security Administration. In addition, a quarter of those who are 65 will live past 90, and one in 10 beyond 95. No one knows how long they will live, but research an estimate. Check out Social Security’s longevity calculator.

Next, consider all sources of retirement income you believe you will have including:

· Social Security retirement benefits and other annuities you may have purchased

· a defined benefit or defined contribution (typically a 401(k) pension)

· traditional IRAs, Roth IRAs

· brokerage accounts

· bonds

· dividends

· inheritance

· rental property

· a home equity line of credit (HELOC)

Third, consider your likely expenses in retirement, based on spending patterns in recent years, and how they might change in the first year of retirement, and thereafter. Take into account any debt you have including credit card debt, vehicle loans, student loans for yourself or those you have cosigned for other family members, and mortgage debt.

Aim to pay off as much as you can in the years preceding retirement. If you have various types of debt, mortgage debt is typically the last one to pay off, if possible.

Experts recommend re-evaluating your expenses and resources at least once a year during retirement. They advise aiming to pay your relatively fixed expenses – housing, food, utilities, property taxes – with steady sources of income. Those can be Social Security retirement benefits, a defined benefit pension that is not tied to the fluctuations of the stock market, possibly rental income from investment property, and, possibly, annuities.

“Look at all your sources of income,” says Roger Young, vice president and senior retirement coverage manager at T. Rowe Price. “Look at the whole big picture. What’s the spending level you can afford and have a high probability of success?”

Read: How will boomers draw down their 401(k) balances?

There are two basic ways to calculate the financial resources you will need for retirement. One method is to assume you will need 75% to 80% of your preretirement gross income, and the other, is to create a budget. With a budget, you create a relatively precise spending plan for the first year of retirement. With a detailed budget you anticipate your basic expenses and will realize how much income you’ll need to cover them.

Will your Social Security be enough for at least some of your basic expenses?

Use your most recent spending patterns to figure your expenses, and adjust for how you expect things might change in that first year of retirement. Be sure to add items like potential home repairs, even the possibility of needing a new roof. Better to overestimate expenses than be caught short.

To get an estimate of what your Social Security retirement benefit is likely to be, go on the Social Security Administration’s benefits estimator tool.

“Match your guaranteed sources of income to your recurring expenses,” says certified financial planner Brent Neiser, chief executive and host of What’s Next with Moneyand a former chair of the Consumer Advisory Board at the Consumer Financial Protection Bureau.
A key point here is to determine whether and how you can delay claiming your Social Security retirement benefits until 70, so you’ll receive a higher benefit throughout your retirement years.

Then, ask yourself, will you be able to afford the lifestyle you’ve had before retirement? Once you know the streams of income you will have in retirement and your approximate monthly costs, it may become clear that you have to have to reset your target retirement date or adjust your spending now to prepare adequately for a future target date.

“Working longer is one of the best things” you can do,” Neiser says. You’ll likely shorten the length of your retirement, be able to save more, grow your Social Security retirement benefits with delayed retirement credits and add one or two higher income years to the calculation for your eventual Social Security benefit. The SSA calculates your benefit using your highest-earning 35 years of your work history.

Once you’ve created a budget, you can see if and how much you might have to draw down from retirement and other accounts you may have.

If you have retirement accounts, you’ll be required to draw down required minimum distributions (RMDs), which begin at 72 unless you reached 70 ½ before Jan. 1, 2020

According to the Internal Revenue Service, your RMD is “the minimum amount you mustwithdraw from your account each year.” RMDs are included in your taxable income for that tax year. The minimum distribution rules apply to tax-deferred accounts including:

  • traditional IRAs

  • OCT IRAs

  • SIMPLE IRAs

  • 401(k) plans

  • 403(b) plans

  • 457(b) plans

  • profit-sharing plans

  • other defined-contribution plans

Another way to estimate how much you might safely spend down is to use the calculators on various brokerage websites. Most brokerage companies have tools including retirement income calculators such as the one Fidelity offers, or one from Vanguard. Another is offered on the T. Rowe Price website. Be aware of their assumptions and methodologies, which are typically explained online.

If you use any of the calculators available online such as those mentioned above, be aware of their limitations. “It’s a reasonable starting point (but) not super tailored to your situation,” says T. Rowe Price’s Young. “Look at what the assumptions are,” such as how much it assumes your portfolio will grow each year. With the current market volatility and inflation, it’s preferable to consider the possibility of lower future market returns and higher inflation, even if the calculator does not.

“Online calculators can give wildly different answers,” says economist Wade Pfau, author of “Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success.” He adds, “One of the main issues is the return assumptions used. Some just use historical average returns which makes it easier to show ‘success’ than using returns that reflect the lower interest rates today.”

Calculators also may estimate or assume income from a hypothetical annuity purchase, so be aware of that. In addition, says Neiser, “Tax considerations may not be used in the calculator,” such as future taxes on Social Security retirement benefits. Using a calculator “helps highlight the key inputs,” but those figures can vary depending on stock market fluctuations and cost-of-living adjustments from Social Security and any pensions, if they have a cost-of-living adjustment. (Many pensions don’t have COLAs or the COLA has been cut.) “You can learn from the calculators,” Neiser says.

In addition, financial and retirement planners may have their own proprietary software that present various scenarios to clients based on different assumptions and tax implications.

A low-interest environment, stock market volatility and inflation have altered the retirement landscape. The 4% spending down rule that Bill Bengen first developed based on research in the 1990s has been called into question recently (even by Bengen).

The bucket strategy, first developed by certified financial planner Harold Evensky in 1985, has more than one variation. For example, certified financial planner Andrew Feldman of AJ Feldman Financial, recommends three buckets: (1) cash—at least a year’s worth of expenses; (2) relatively fixed income such as Treasury bills, short-term government securities with maturities ranging from a few days to 52 weeks; Treasury Inflation-Protected Securities, and Series I Savings Bonds. The amount in this second bucket can be, for example, three years’ of expenses. “You can use this bucket to replenish the cash” bucket, Feldman says. (3) The third bucket is equities that can “ride out the volatility,” he says. This bucket takes more risk with your money, and hopefully yields more than 4% growth per year.

“The three buckets all together make up your portfolio,” he says. “The three bucket (approach) marries the psychological and the mathematical.”

Remember, if you’re still concerned you might run out of money in retirement, consider working longer or cut back on your spending or both. According to a T. Rowe Price March 2021 report, “Decoding Retiree Spending: A better understanding of spending patterns may transform retirement income solutions” by Sudipto Banerjee, retirees often cut their spending by 2% a year, depending on their assets and situation.

Be realistic about your situation, and find a lifestyle you can comfortably afford.

Harriet Edleson is author of the book, “12 Ways to Retire on Less: Planning an Affordable Future” (Rowman & Littlefield). A former staff writer/editor/producer for AARP, she writes for The Washington Post Real Estate section.

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