How to keep your retirement savings from running out too soon
It's an understandable concern, but one you can address.
If you're entering retirement with a nice sum of money saved up, give yourself a pat on the back. Many seniors end up having to mostly live on Social Security because they don't manage to bring savings with them into retirement.
But after working hard to build up a sizable IRA or 401(k) balance, the last thing you want is to gradually watch your retirement savings run out. Here are some key steps you can do to reduce that risk substantially.
1. Don't wing your spending
Many of your expenses might stay the same in retirement as during your working years. But you may find yourself spending more on things like leisure and travel, given your newfound free time.
That's not necessarily a bad thing. But it's important to have a budget so you can keep tabs on your spending and make sure you're not going overboard. Your budget should account for planned and recurring expenses, discretionary spending, and one-off expenses, such as an insurance premium you might only pay once a year.
2. Rely on income-producing and growth investments
If you want your retirement savings to last, you need to put a good portion of your money into assets that can outpace inflation. To that end, you don't want to dump your growth stocks and exchange-traded funds (ETFs), even though they carry risk.
Many retirees maintain a 40%/60% split between bonds and stocks in their portfolios. Within the stock portion, you may want to consider keeping at least one-third invested in growth vehicles.
For the remainder of your stock portfolio, concentrate on stocks or ETFs with generous dividend yields. The more income your portfolio generates, the more staying power it's likely to have.
3. Create a withdrawal strategy that's specific to you
Even if you manage to retire with a multimillion-dollar IRA or 401(k), it's important to make sure you're not withdrawing too much money at any given point in time. To that end, come up with a withdrawal strategy based on your spending needs, legacy goals, and outside income sources.
You may, for example, want $120,000 a year to live comfortably. But if Social Security provides $50,000 of that, it takes some pressure off of your savings.
Similarly, you may be able to afford to withdraw $150,000 a year. But if you're looking to leave an inheritance, you might specifically limit the amount you withdraw annually -- especially if, in your mind, not leaving a legacy is just as bad as running out of funds.
4. Prepare to be flexible
When the stock market goes through a slump and the value of your investments drops, you run a real risk of locking in permanent losses that put you at a greater risk of eventually running out of funds. To avoid getting hurt by market downturns in retirement, adopt a flexible mindset.
For the most part, that means being willing to reduce your spending when the market is down, or to work part-time to withdraw minimally from your savings while you wait out a recovery. If you're amenable to either option, it could spell the difference between straining your savings versus keeping your IRA or 401(k) intact.
5. Maintain a cash buffer
Another great way to avoid having to sell off portfolio investments at a loss is to maintain a strong cash cushion. If you have money to cover your needs during market downturns, you won't have to sell investments when they've lost value.
The amount of cash you keep on hand should depend on your income needs coupled with your willingness to work and reduce spending as needed. If you don't think work is possible and you feel you only have the wiggle room to reduce spending by 5% to 10% during a downturn, then you may want to keep two to three years' worth of living expenses in cash.
The idea of running out of money in retirement is scary, especially when you've worked so hard to amass your nest egg. But if you follow these steps, you can reduce that risk substantially and buy yourself more peace of mind.
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