How to Make Your Money Last in Retirement
Whether you are already retired or just beginning to plan for your life after work, the question, “Will I outlive my money” is likely a top concern. Since there is no exact timeline on how long we will live or what our future may hold, it’s understandable to feel some uncertainty about the road ahead. Thankfully, there are several ways you can increase the odds that your money will last as long as your retirement. Here are a few options to strengthen your situation during these milestone years.
Have a Retirement Spending Plan
Similar to a budget, a spending plan helps you organize your finances so you can travel, shop, and pursue other leisure activities with confidence. Having a strategy that is thoroughly thought out will help you establish the details of what you'd be able to afford in retirement. Working with a financial planner as you prepare can help you understand how to support the retirement of your dreams.
A spending plan does not need to be an elaborate line-item budget. You simply need to know how much you can afford to spend, be clear on your priorities, and monitor your spending so you stay well within a sustainable range.
The point is to prevent overspending, a common occurrence in retirement. While we often have plenty of time to recover from the financial mistakes of our youth, those who overspend in retirement do not have years of employment ahead to recoup monetary losses.
How much can you take from your investments without overspending? In recent years the 4% rule of thumb has become popular. For example, if you save a million dollars for retirement, the 4% rule would suggest your savings and investment would earn approximately $40,000 a year. So the idea is that you would plan to spend $40,000, not including any funds from guaranteed payments like pensions or Social Security.1 But this approach has problems.
While this can be a good starting point for many, we find this approach to be grossly oversimplified. Fluctuations in cash flow can make the 4% rule hard to apply. One spouse may retire before the other, or it could be advantageous to delay Social Security until age 70 even if the recipient retires earlier. If you expect your income to fluctuate in retirement, you may wish to consult with a financial advisor who can help you determine a spending rate that’s sustainable in your unique situation.
If you're passionate about your career or enjoy helping others, you may benefit from waiting to retire for an extra year or two. Not only does staying employed increase your overall standard of living, but if you're healthy and prepared to continue working, your Social Security could end up being greater in your remaining years.
In addition, remaining employed allows your retirement assets an extra year to increase (through additional savings and asset growth), and reduces the number of years your assets have to sustain you.
You may also want to consider transitioning out of the workforce slowly. If you're able to take on less responsibility or work part-time, you may find that continuing to work is less of a chore and is beneficial in the long run. Some people consult part-time in their profession and find that they enjoy the work when it’s limited to a few hours per week or a short-term project. Others retire into part-time work in a new, and frequently lower-paying, field. Even moderate income from work can make a substantial difference in your long-term retirement sustainability.
Protect Your Health
Being sick is costly mentally, physically, and financially. Making healthier choices throughout our lifetime can help reduce the odds of suffering from conditions such as diabetes, high blood pressure, arthritis, or other chronic illnesses. This can result in lower lifetime healthcare expenses.
As we grow closer to retirement, it's important to consider that spending money on a healthy lifestyle, as well as receiving regular screenings and proper medical care, can help improve quality of life. Spending enough on preventive care now can help you avoid more costly care in the future. (Ken’s seen this, with dental treatment of a few hundred dollars reducing the chance of much more invasive—and expensive—oral surgery years down the road.)
Take Control of Your Retirement Income
When it comes to funding your retirement, most Americans use a combination of Social Security, savings, and investments (and pensions, if they have them). It's important to set yourself up for success and think creatively, since these sources of income may not always meet your expectations.
Understanding your expenses and the details of your income as a pre-retiree will help you maintain your wealth throughout your retirement. Remaining in control of your finances and being aware of your spending habits will allow you to focus your time and energy on the experiences that matter most to you. We want you to think about your retirement sustainability just enough that you can then comfortably put it out of your mind, so you can enjoy all the things in your life that are more important than money.