How to Ensure Not Running Out of Money in Retirement
This post was last updated on December 31, 2022, to reflect all updated information and best serve your needs.
If you’re concerned about whether or not you will have enough money in retirement, you should be. Research has shown that men and women are living longer, which means we could well have a good 30 years of life left in retirement. 
Experts say that today’s retirees can expect to live 40% longer than those who retired 70 years ago. Will you have enough money? Here are three ways to ensure you won’t run out of money in retirement: start planning now, create multiple streams of income, and withdraw, or don’t withdraw wisely.
Start Planning Now
It’s never too early to start planning for retirement. Many people start planning several years before they plan to retire. The early you start planning, the better. Living comfortably in retirement requires thoughtful planning and revisitng your plan regularly.
Save, Save, Save
This can’t be stressed enough; start saving now. The sooner you start saving, the more time your money has to grow. The longer you wait, the harder it will be to ensure not running out of money in retirement. It’s a good practice to save at least 10% of your gross income, but if that’s not possible, save whatever you can and then increase it a percent or two every year.
Manage What You Save
There’s a reason why we plan for retirement. If you’re saving money, make sure you know how to manage it. Emergencies will arise, but your retirement account is not for that. Emergency accounts are for emergencies. Keep a close eye on your retirement account and deposit into it consistently.
Eliminate Debt Before You Retire
It might not be possible to be completely out of debt when you retireme, but eliminating debt reduces expenses and increases peace of mind. Consider the biggest debt you have, and develop a plan to be rid of it before you retire. Carrying substantial amounts of debt into retirement will eat away at your money quickly.
Create a Plan for Long-Term Care Expenses
None of us know the condition of our health in older age. However, retirement life will be less stressful if a long-term care plan is in place if you need it. According to the U.S. Department of Health and Human Services, 70% of people need some type of long-term care — and those costs are not cheap.
Long-term care expenses can range from $51,000 to over $100,000 a year, and most people are never prepared for it. Planning for healthcare goes a long way to ensure you're not running out of money in retirement.
If your savings is significant enough, you will have the funds you need should you need them for long-term care. This is often referred to "self-insuring." If you don’t have significant savings, you may want to plan on securing long-term care insurance.
Create Multiple Streams of Income
A common rule of thumb is to replace at least 80% of your pre-retirement income. However, your retirement expenses will vary.
Social Security may make up some of it, but what about the rest? Only when you’re able to determine where your money will come from will you ensure not running out of money in retirement.
You'll want to plan around all your sources of income and make sure you don't have any income gaps.
Invest the Money You Save
Retirement Accounts
Having multiple saving mechanisms is a smart way to save. Try maxing out your contribution to your retirement accounts, like your 401(k) or IRA. When you reach the age of 50, each year, you can contribute $1,000 more to an IRA and $7,500 more to a 401(k) account as a catch-up provision.
Investing is always involves some risk. You never know what the market will be like when you retire. People who retire during or right before a bear market stand could lose a substantial amount of their retirement income. A bear market is when the economy is receding, and most stocks are at a decline.
Consider those who retired in 2007, right before the market crash of 2008. Stock portfolios fell to about 50% of their value. A loss of that magnitude may affect your withdrawal strategy. Don't worry too much, there are way to adjust yourfinancial plan to avoid doing long-term damage to your portfolio.
Many financial planners employ strategies to pull funds out of the market ahead of when it is needed. This ensures potential losses from a bear market won’t be as devastating to your long-term retirement success.
Annuities
Another strategy to avoid the risk of downside in the market is to purchase an annuity. Most annuities can be purchased through an insurance company. They are a great way to get you a steady stream of income over a period of time or the rest of your life.
Fixed-rate annuities can be a good option, as they typically have lower fees and commissions. These annuities don't generally have any adjustments for inflation, they're a flat, fixed dollar amount provided through the term.
Indexed or variable annuities can offer some inflation protection, but like anything else, there are fees and commisions involved.
No matter what, annuity contracts are designed to ensure the insurance company always makes money. This doesn't mean you don't gain any value. You just have to understand that annuities are just another tool to convert your money into a stream of income.
Dividend Stocks
Consider investing in dividend stocks. Dividend stocks can be a great source of additional income. Most dividends are paid out quarterly. You can re-invest it back into the company (by purchasing shares with your dividends) until you really need it.
What you want to do is find companies that are doing excellent in their business, with stable incomes and strong track records when it comes to their dividends. It’s always best you research this yourself before deciding on the company to invest in.
An even more efficient way to invest in dividend stock is through mutual and index funds. These are professionally managed funds to give you a diversified portfolio of stocks without having to buy each individual stock yourself.
Dividends aren't everything though. Each company has a choice on if and how much dividend they offer. Whether the company keeps the earning reinvested in the company (raises the share price) or returns profits to shareholders through a divend, the company still needs to remain profitable to be a good investment.
Interest-Paying Bonds
Interest-paying bonds are also another option for steady income. Bonds are an entity’s way to borrow money from you, but they pay you back in interest payments with an agreeable date to return your money to you. The two ways to make money from investing in bonds are: to hold the bond until its maturity date and collect the interest on it. Interest is usually paid out twice a year.
The other way to make money is to sell the bond at a higher price than what you initially paid. To do this second option, you would need to be keeping an eye on the market to know when the value has increased. There are three different types of bonds:
- Corporate bonds
- Municipal bonds
- Treasury bonds
Add Passive Income
Passive income is income you earn regularly from work you’ve already done on the front end. That is the perfect income to have in retirement since most of us may not be up to working extremely hard.
In retirement, you have other fun stuff you plan to do. Here are some cool ideas you can start doing now for earning passive income that will still be coming to you in retirement:
- Buy a rental property - Consider purchasing a commercial building or residential property to rent out to secure a monthly income.
- Rent a room on your own property - If you have the extra space and know someone looking for space, consider renting. That is money you know you will be receiving every month.
- Buy/create a vacation rental - If you plan to travel a lot in retirement, consider listing your home with Airbnb while you’re away. This way you can make money while you’re away.
- Rent out campsite space - If you have a lot of property, consider registering with Hipcamp, where they allow you to host space on your property as a campsite for people on the road.
- Invest in a small business - Look around the area you live in. Is there a small business that’s doing well? Maybe they could benefit even more from an investment partner. In exchange for your investment, the two of you could work together to determine a mutual benefit to you as the investor. This could possibly come in the form of monthly earnings.
- If you’re good at crafts or have hand-made products you could sell, there are platforms you could join to sell your products. They take a lot of the heavy-lifting off of you. Platforms like Etsy and Amazon are great to house and sell your products online.
Work Part-Time
While passive income is income you earn from doing something one-time, earning additional income could also consist of working only when you want to. Here are some great ways to do that:
- Earn income doing what you love - When you’re doing what you’re passionate about, it doesn’t even seem like work. If you love to cook, Travelingspoon provides an opportunity for amateur chefs to teach people to cook right from their homes. So, you don’t even need to go anywhere. You just do what you love and earn extra income.
- Become an independent salesperson by selling products you use yourself and know others will get value from having them. Companies like Avon, The Pampered Chef, Rodan Fields, doTerra, and Forever Living are reputable and good opportunities. You sell only when you want to.
- If you have expertise in a certain area, it’s always a great idea to give back by teaching others what you know. A couple of ways to do that is by consulting. If someone values your knowledge, they can pay for you to be their consultant. Another way is to tutor on the side. Charge hourly rates to tutor kids or adults trying to learn a subject. You set your own hours and charge what you want.
- You could also teach an online course. More people are looking to fulfill their academic requirements online. Platforms like Teachable.com and Udemy are popular for students to go to when they’re looking for online learning.
- Whatever you enjoy doing, you can bet there’s someone who needs it done but doesn’t enjoy doing it. Whether it’s repairing bikes, mechanics, or gardening, someone is willing to pay you to do it for them. NextDoor is a community message board ideal for people to find someone for the services they need.
Withdraw, Or Don’t Withdraw Wisely
Retirement savings accounts are the best way to ensure you not running out of money in retirement. For this to work for your benefit, some general rules apply.
Among those is the penalty of withdrawing too early. If you withdraw from your retirement savings before you reach a certain age, you will be penalized with a fee, along with taxes. In the end, it’s a double whammy to your pocketbook and a loss of retirement income when you really need it.
The other side of that is when you are of age to withdraw penalty-free, you don’t want to withdraw too much at one time. Again, with the potential to live an additional 30 years after you retire, some basic guidelines are in place for your good.
A very broad general rule of thumb is to withdraw 4% from your retirement savings annually and then adjust that for inflation every year. That is so that you won’t run out of money over those 30 years.
Conclusion
The best thing to do to ensure you don't run out of money is to plan, save, invest, and spend wisely. If you're spending less than you earn, before and after you retire, you'll be okay. The trick is to start planning early and make sure your savings and investments cover all your goals.
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