6 Ways to Avoid Running Out of Money in Retirement

Retirement saving is the most important aspect of managing personal finance. Probably I wrote about retirement most often after “saving Money” topics. I generally don’t turn down a guest post offer which contributes to retirement planning. This post talks about options when you fall short of funds. I sincerely hope you’ll never face this situation really. Enjoy the post!

When Social Security benefits are uncertain, pensions are rare and the economy is constantly in flux, workers reaching the age of retirement may be wondering about the financial security of their golden years.

Here are a few ways to avoid running out of money during retirement:

Make a Plan

Take some time to create a plan for your retirement. Contact your financial adviser, visit reputable financial websites or read books on successfully planning for retirement. The more time you give yourself to plan, the more stress-free your retirement will be. Making a plan will show where you stand financially and if your retirement will sit comfortably. If not, you have the tools to develop a strategy for the future.

Think about recurring monthly expenses, such as utilities, car payments or other bills, and other expenses such as groceries and entertainment compared with your projected monthly retirement income. From here, you can make a concrete plan so you don’t run out of money.

(Related – Ideal retirement asset allocation for your age)

Invest in an Annuity

Social Security benefits may not seem as secure as they once did, but they were never intended to be your sole source of income during retirement. Consider investing your money in an annuity – an insurance product that can provide you with a steady stream of income during your retirement – on top of your Social Security.

An annuity is a financial contract between you and an insurance company. In return for an initial premium or premiums over time, which grow tax-deferred until withdrawal, an insurance company repays you in regular disbursements starting at age 59½. These disbursements not only include the principal of your investment, but also any interest the annuity has earned over time.

Annuities are long-term investments with certain money-back guarantees. They protect your investment and ensure that your investment will have a fixed rate, or time period, of return.

Protect Your Assets from Inflation.

Using a portion of your retirement assets to secure a fixed lifetime income can be a smart financial move, but if your investment is not protected against inevitable inflation, it could be a major financial risk.

Retirement often lasts 30 or more years, and a guaranteed fixed-income may not allow you to maintain your current lifestyle without protection from inflation. If you retired 20 years ago with a fixed income of $20,000 a year, because of inflation, today, you would need about $57,000 a year to maintain the same lifestyle.

Inflation rates are never consistent, but over the past 20 years, inflation averaged 3.23 percent, and experts suggest these rates could be similar in the future.

To protect your assets from inflation, there are a number of insurance companies that offer inflation-adjusted annuities, from 3 percent to 4 percent, to protect against projected inflation costs.

Some inflation-adjusted annuities may increase payouts by 3 percent or 4 percent each year, but you would see a cut in your monthly payouts the first couple years.

For example, if you purchased a $100,000 annuity with inflation-adjusted protection at age 65, it would yield about $170 less a month the first year than without inflation protection. In about 15 years, the payouts would break even.

If you have an annuity without inflation protection or the protection isn’t enough to get you through a major life event requiring more of your assets during retirement, such as medical expenses or buying a new home, you have the option of selling your annuity for a lump-sum payment, but there may be other fees involved.

Expect the Unexpected.

Retirement may be referred to as the golden years, but it is also the years of growing older, which could mean emergency hospital visits and unexpected expensive medications. While saving for retirement, these emergency events should be accounted for. While you may not be physically ready when they happen, you should always be financial ready.

Sock away money in an emergency fund, and don’t touch it unless you really need to.

Downsize.

When your children are grown up, leaving you with an empty nest, you might not need that house with two or three spare bedrooms anymore. As you get older, those stairs may become harder and harder to climb, and that big yard may become more difficult to maintain. Retirement may be a good time for you to settle in a smaller, more efficient home, while lowering your cost of living.

If you’re not ready to part with your home that has filled many memories, there are other ways of downsizing. You can replace your SUV with a more gas-efficient sedan, cut your monthly spending or take fewer vacations. No matter how you choose to do it, downsizing can upsize your retirement.

Work into Retirement.

There is no rule that you have to stop working when you’re 62 years old. Although it may be preferable, not all of us can stop working when we want to. You may decide to continue working at your full-time job, or you may want to find some part-time work to hold you over through retirement.

(Related – Regular Income ideas for Seniors and Retirees)

Elderly at work

Because we live in a time where jobs are scarce, it may not be easy finding a part-time job when you’re 62 or older, but consider applying for a job at a local grocery store or home improvement store. If you’re a hands-on kind of person, you may even want to look into landscaping jobs.

The paycheck you would receive from working a couple of hours a week may help you get through your retirement more comfortably, and studies actually suggest that people who remain physically and mentally active during retirement live longer, healthier and more productive lives.

Retirement should be a time to relax and enjoy the life you’ve lived and the years to come. However, financial worries are common among those getting closer to retiring. If you start with a plan, invest wisely with inflation in mind, keep an emergency fund, downsize where it’s needed and work if all else fails, you are well on your way to a financially successful retirement.