Introduction
With people living longer than ever before, today’s retirees face the risk of outliving their savings. The average American life expectancy now surpasses 79 years, up from just 62 years in 1935. This longevity bonus means retirement funds must last for 20, 30, or even 40 years in some cases.
Outliving one’s money in retirement leads to significant lifestyle cutbacks and stress in what should be golden years. However, with prudent planning, investors can deploy strategies to avoid draining assets too quickly. This comprehensive guide outlines proven techniques to make retirement savings last.
Start Saving Early and Consistently
One of the best protections against going broke in retirement is to begin saving early and consistently. The sooner investors start socking away money in tax-advantaged retirement accounts like 401(k)s and IRAs, the more time their funds have to potentially grow through compounding.
Consider this example:
- Amy begins contributing $300 per month to her 401(k) at age 25. Assuming a conservative 6% annual return, she would have around $559,000 saved by age 65.
- Mark waits until age 45 to begin contributing $300 per month to his 401(k). At 6% annual returns, he would have only $138,000 saved at 65.
By starting 20 years sooner, Amy accumulated over 4 times as much despite investing the same monthly amount simply by harnessing the power of compound growth over a longer timeframe. This illustrates why consistent saving from an early age is a potent hedge against running out of money later in life.
Utilize Employer Matching Programs
Workers should fully utilize employer matching programs on retirement account contributions. Typically, companies match a portion of an employee’s 401(k) contributions up to a certain level.
For example, if an employer provides a 4% match on contributions, that effectively doubles any money the employee sets aside up to 4% of their salary. Not fully using matching funds leaves free retirement money on the table.
To optimize matches, employees should contribute at least enough to get the full employer match. Contributing only 2% when the match is 4% means forfeiting half of the free retirement funds from the employer. Take advantage of the entire match to turbocharge retirement savings.
Invest More As Income Rises
One smart savings strategy is to increase retirement contributions as income rises over the course of a career. This takes advantage of larger budgets later in working years. Workers should boost the savings rate by 1-2% annually during their highest earning period in the decade before retirement.
For instance, a 35 year old contributing 5% to her 401(k) could up this steadily to 15% by age 65. This takes maximum advantage of peak earning power through middle age when salaries typically hit their zenith. Ramping up savings when possible helps build the nest egg.
Tax-Efficient Withdrawal Strategies
Carefully structuring retirement fund withdrawals to minimize taxes preserves more capital. Two keys tactics are harvesting tax losses and toggling accounts:
Tax Loss Harvesting – Strategically realizing losses in a taxable investment portfolio offsets realized capital gains, reducing the tax bite. Losses banked in one year can be applied to gains in future years.
Account Toggling – Withdrawing partially from pre-tax 401(k)s and tax-free Roths each year keeps taxable income lower versus tapping only one account. This helps retirement funds last longer.
Choose Income-Oriented Investments
Shifting a portion of retirement assets to income-generating investments helps supplement other withdrawals. Key options include:
- Dividend stocks – Large cap, blue chip stocks often pay steady quarterly dividends. These provide a passive income stream without selling any shares.
- Bond ladders – Laddering bonds with staggered maturities provides regular income from bond coupon payments.
- Annuities – These insurance contracts can provide guaranteed lifetime income in retirement for a lump sum upfront payment.
- Rental property – Owning real estate rented out can supply rental income to live on in retirement.
Delay Social Security Until Age 70
Delaying Social Security until age 70 optimizes the value of this inflation-adjusted income source. Benefits grow by 8% annually from full retirement age up until age 70. This boosts monthly payments by over 75% for those who can wait.
For a hypothetical worker with a $2,000 monthly benefit at full retirement age of 67, delaying until 70 would increase this to $3,500 per month. This added base income allows retirement savings to last longer.
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Downsize Housing & Relocate If Beneficial
Many retirees can unlock home equity and reduce expenses by downsizing to smaller, lower cost homes. This also eliminates maintenance costs on larger properties. Likewise, relocating to areas with lower costs of living and taxes can stretch savings farther.
A 2021 Bankrate study found nearly half of retirees have moved in retirement or plan to move, with lowering cost of living the top motivator. Lower housing costs also allow more room in budgets for discretionary retirement spending.
Earn Side Income If Needed & Desired
Some retirees enjoy supplementing their nest egg by earning part-time income from side jobs, passion projects or consulting gigs. This provides a financial cushion without fully drawing down investment accounts.
Common modern retiree side jobs include driving for rideshares, teaching, paid online work, Airbnb hosting, freelance writing and consulting. Work flexibility is critical at this life stage. Side incomes allow savings to last longer.
Manage Withdrawal Rates Using the 4% Rule
The 4% rule provides a guideline for sustainable withdrawal rates from retirement savings. Initially draw down 4% of total savings in year one, then increase withdrawals annually only by an inflation adjustment.
Over 30 year periods historically, this initial 4% withdrawal rate was generally sustainable without prematurely extinguishing savings while still allowing for rising income. Investors can use this as a baseline for calibrating their own spending.
Maintain an Emergency Fund
Carrying an emergency cash buffer averaging 3-6 months of spending gives retirees a critical backstop against surprise expenses. This ensures unplanned costs don’t immediately eat into long-term investments, avoiding selling at inopportune times.
Retirees have ample risk exposures from home repairs, uninsured medical bills, automobiles and other big ticket costs. Having an emergency fund in cash equivalents provides insulation without tapping retirement accounts.
Consider Annuities and Guaranteed Income Products
For risk-averse retirees, annuities and other guaranteed income products are worth considering. These instruments provide insurance against longevity risk or market declines exhausting savings too quickly.
Annuities allow converting a lump sum into guaranteed lifetime income, while fixed index annuities offer upside exposure to markets without downside risk past a certain threshold. There are myriad products to mitigate retirement risks.
Use Home Equity Judiciously If Needed
Many retirees have built up substantial home equity that can serve as a potential backup reserve if used judiciously. However, this should generally be a last resort given risks like housing declines and the impact of lost equity on estate planning.
Reverse mortgages allow accessing home equity while still living in the home. These come in several forms such as tenure, term and line of credit. There are pros and cons to utilizing home equity that must be weighed carefully based on individual circumstances.
Cut Discretionary Spending If Necessary
If retirement savings still appear on track to be exhausted too early, discretionary spending may need to be pared back. Focus spending on essentials and most rewarding discretionary items, eliminating luxuries provide little happiness or value.
Examples of easier cuts include expensive cable packages, frequent dining out, premium vehicles, excessive travel, country club memberships and frequent wardrobe upgrades. Retirees should prioritize spending on family, friends, experiences and passions.
Consider Relocating Overseas To Reduce Costs
For the adventurous, retiring overseas can dramatically reduce living costs, especially in developing Southeast Asian and Latin American countries. International Living Magazine’s 2022 survey highlights the 10 best places overseas for U.S. retirees.
While not without challenges, those able to relocate abroad are often able to stretch retirement budgets twice as far. Key considerations are healthcare access, financial systems, infrastructure, weather and visa requirements. Rental income from any U.S. owned property provides additional income.
Delay Starting Social Security
One option to increase retirement income is to delay starting Social Security past normal retirement age up to age 70 if possible. This permanently increases monthly payments by about 8% per year of delay through delayed retirement credits.
For example, monthly income for a $1,500 benefit at normal retirement age of 67 would increase to around $2,000 if delayed until age 70. While entailing short term sacrifice, this can provide substantially more income over the long run.
Work Part-Time If Able and Willing
Some healthy retirees choose to work part-time jobs during early retirement before later fully retiring. This maintains labor force engagement, provides social benefits, adds income and allows continued retirement contributions.
Part-time work and phased retirement allow testing full retirement while ensuring adequate savings. Low stress jobs with flexibility are ideal, such as consulting gigs, passion projects or positions with nonprofits. Working longer eases sequence of returns risk as well.
Ask For Help From Family If Necessary
As an absolute last resort, retirees who have prudently managed savings and expenses but still face financial challenges can ask family members for assistance. This could come in the form of gifts, loans or inviting elderly parents to live with them.
While not an ideal outcome since independence is valued, family help beats the alternatives of an inadequate standard of living or bankruptcy in retirement. Any gifts received can also then be passed down as an inheritance.
To Recap
Today’s longer lifespans mean retirees must ensure financial resources last for decades not years. However, with diligent preparation and prudent management, investors can deploy strategies to avoid draining assets too quickly.
The keys are starting to save early, spending judiciously, planning withdrawals carefully, and utilizing all available tools and options. With the right approach, today’s retirees can enjoy their well-deserved golden years without fear of going broke.
Frequently Asked Questions
How much savings should I target for retirement?
A general rule of thumb is to accumulate savings of 10-12 times your desired final working year income by retirement. However, required savings vary substantially based on expected retirement spending needs and sources of fixed income.
What are safe withdrawal rates in retirement?
The seminal “4% rule” states initially withdrawing 4% of total retirement savings, increasing it annually only by inflation, is historically sustainable over 30 year periods. However, a more conservative 3-3.5% initial withdrawal rate may be more prudent given today’s low fixed income yields.
When should I begin collecting Social Security benefits?
While delaying Social Security until age 70 provides substantially higher monthly income, there are scenarios where claiming earlier makes sense. For those in poor health or who lack adequate savings, claiming anywhere from 62-67 can provide more total lifetime benefits.
How can I generate more income in retirement?
Part-time work, side jobs, rental income, annuitization, and dividend stocks are some of the best ways to increase cash flow in retirement beyond typical withdrawal strategies. Maximizing Social Security through delayed filing also boosts monthly income.
What fixed expenses should I budget for in retirement?
Focus on essentials including housing, utilities, transportation, food, healthcare, insurance, property tax and any debt payments. Discretionary spending on travel, dining and hobbies can be added as savings allow. Build in emergency fund reserves as well.
How can I reduce taxes in retirement?
Contribute to Roth accounts, manage capital gains strategically, harvest tax losses, limit taxable withdrawals and take advantage of zero capital gains on home sales up to $500,000 if married. Filing jointly and using deductions can also optimize tax scenarios.
What are top cities overseas for retiring to stretch my dollars?
Top overseas cities for low cost retiree living include Chiang Mai, Thailand; Cuenca, Ecuador; Penang, Malaysia; Da Lat, Vietnam and Granada, Nicaragua according to International Living magazine’s annual global retirement index.
Are annuities a good idea to create guaranteed lifetime income?
For risk-averse retirees, annuities can make sense for covering essential fixed expenses. However, returns and fees should be evaluated closely. Annuities should likely not constitute an entire retirement portfolio but can mitigate risk as part of the balanced strategy.
How can I reduce housing costs in retirement?
Downsizing to smaller homes or condos in lower-cost states or countries can significantly cut housing costs. Delaying selling the home and acquiring reverse mortgages are other options. Relocating overseas is another high-potential savings strategy.
In another related article, Defending Against Inflation: Smart Strategies to Protect Retirement Savings
