How to Avoid Running Out of Money in Retirement

Emily Brandon

One of the most common retirement concerns is spending down your savings too quickly and having to cut your standard of living in the later part of retirement. But there are a variety of ways to ensure that your nest egg will last for the rest of your life, no matter how long that is. Here are some strategies to make sure your retirement savings will provide you with enough income throughout retirement.

Maximize Social Security. Your first line of defense against running out of money is Social Security. Social Security payments are guaranteed to continue for the rest of your life, no matter how long you live, and are adjusted for inflation each year. However, it's a good idea to take steps to maximize your payments by carefully deciding when to sign up for benefits and coordinating claiming decisions with your spouse. "Every year that you delay taking Social Security, you get an 8 percent increase in the benefits that you take," says Cathy Pareto, a certified financial planner and president of Cathy Pareto and Associates in Coral Gables, Florida. Spouses can claim as much as half of the higher earner's benefit, and widows and widowers can inherit a spouse's benefit payments if they are larger than their own.

Plan to live until old age. While a 65-year-old man in 2015 has an average life expectancy of 84, and a woman the same age has a life expectancy of 87, there's certainly a significant possibility that you will live longer than average. Many financial advisers recommend that you plan as if you will live into your 90s or even until age 100 in case you do. "We generally fall somewhere between ages 90 and 105," says Bo Hanson, a certified financial planner for Preston & Cleveland Wealth Management in Franklin, Tennessee. "We make that determination based off of what their family history and health issues are." It's better to save up for too many years of retirement and leave the excess wealth to relatives than to prepare for too few years and end up depending completely on Social Security.

Protect yourself from inflation. Inflation can erode the purchasing power of your retirement savings. But you can allocate some of your money to investments that are guaranteed to keep up with inflation. Your Social Security payments and some types of government bonds automatically keep pace with inflation. "There's a government bond that is adjusted for inflation, Treasury inflation-protected securities, so we can build a ladder of those that mature each year in your retirement," says Joel Shaps, a certified financial planner for Bedrock Capital Management in Los Altos, California. "Then they know that bond is going to mature when they need the money." You could also keep a portion of your portfolio in investments that have historically kept pace with inflation such as equities, commodities or real estate.

Consider an immediate annuity. If you're willing to hand over a chunk of money to an insurance company, you can purchase an immediate annuity that will provide a guaranteed stream of payments that will continue for the rest of your life. "Some people want to annuitize a part of their retirement savings to produce enough income that covers their fixed expenses," Hanson says. "You essentially guarantee that no matter what happens with the financial market, you know that your mortgage payment is covered by the annuity." The downside is that your heirs won't receive the money you have annuitized, and some annuities have high fees and complicated mechanics. It's also important not to invest all of your wealth in an annuity because you might need funds available to cope with emergencies.

Withdraw 4 percent or less each year. You should take only small distributions from your portfolio every year if you want the money to last the rest of your life. If you withdraw 4 percent annually from a portfolio invested in 35 percent U.S. stocks and 65 percent corporate bonds, there's an 89 percent chance that the money will last 35 or more years, according to Congressional Research Service calculations. And if you withdraw less money in years when your portfolio performs poorly, it can help your investments recover faster. "When you get into retirement, if you really want to make sure that you don't outlive your assets, you need to control your withdrawal rate," Hanson says. "Somewhere around a 4 to 5 percent withdrawal rate of your assets is probably the most you can do. If you can make sure your lifestyle stays at or below that number, you are setting yourself up for success."
