Outliving Your Retirement Funds: How to Prepare for It

We are living longer -- and that's worrisome to retirees who may not have accounted for that, financially.

According to the U.S. Census, the number of centenarians (people living to age 100 and above) increased by almost 66% from 1980-2010.

There’s a big difference between saving for retirement when you live into your 90s and 100s versus your 70s or 80s.

So:

Costs for things like healthcare and general living expenses can add up resulting in the need for more money in retirement.

You may not have planned for this.

If you think that you are at risk for outliving your retirement savings, find out what you can do to make up the difference.

Work with a Financial Planner

A financial planner or financial advisor can help you create a plan that covers your ideal retirement scenario.

Then, they’ll compare it with your current income, savings rate and other factors that influence what you can feasibly do to save enough for retirement.

Financial planners can also get a sense of your desired lifestyle in your retirement years.

Once you do this, you’ll get a better idea of the numbers it would take to have the quality of life you desire in retirement.

Armed with real goals and accurate numbers, your chances of outliving your retirement savings will decrease significantly.

However, the next step would be to take action according to your financial planner’s advice.

Understand Healthcare Costs then Plan for them

Perhaps the most underestimated cost in retirement is healthcare.

Ideally, you would have talked about this expense with your financial planner or advisor. However, it’s still worth a separate discussion.

According to Fidelity, the average couple will need about $285,000 for medical expenses in retirement. This doesn’t include long-term care needs which could cost up to $3,000-$7,000 a month depending on the level of care.

If you don’t want healthcare costs to cut too far into your retirement income, one option would be to contribute to a health savings account (HSA).

An HSA is a tax-advantaged account that allows people to cover medical expenses.

HSAs have three tax advantages:

  • Depending on your situation, HSA contributions can be tax-deductible or made with pre-tax money.
  • The money in your HSA account grows tax-free.
  • Unlike 401k and IRA withdrawals, qualified withdrawals (for medical expenses) are tax-free.

The key is to begin making contributions to your HSA early on, since you can’t when you become eligible for Medicare and turn 65.

Once you turn 65:

You are free to HSA funds for other things besides medical costs but those withdrawals are subject to income tax.

If you don’t want to draw down funds from accounts where your withdrawals are taxed, the HSA is a great alternative to help cover medical costs.

This strategy takes a long-term outlook and approach but could be worth it in the long run to have the extra money for medical or other living expenses in retirement.

Tweaking Your Investments

Ideally, your retirement account balances will produce an annual income that allows you to live according to the lifestyle goals you’ve set with your financial planner.

For example, a one million dollar portfolio could produce about $50,000 each year assuming a 5 percent return. A two million dollar portfolio would produce double that or about $100,000.

Now:

Because you might live longer, you could consider tweaking your retirement portfolio to be a little more aggressive for a little longer.

This means:

Holding onto stocks for longer. This is a change that you have to keep in mind especially if you've got target-date retirement funds that automatically reduce risk as you age.

You can work with your financial planner to find the best asset allocation strategy in retirement that allows you to have consistent income plus growth prospects if it looks like you could outlive your retirement savings.

Modify Your Lifestyle

This is a broad recommendation that can take on many practical actions.

Here are some lifestyle changes you can make so that your retirement savings don’t run out.

Wait to collect Social Security benefits

You’ve been waiting, with bated breath, to collect Social Security benefits all your life.

The moment you hit age 66 is when it’s finally time to get the benefits you’ve paid into. Hooray!

However, if you are able to delay receiving Social Security benefits past your full retirement age, future payments are increased by up to 8 percent for every year that income is deferred until you turn 70.

For example:

If you wait until age 67 to collect Social Security benefits , you'll get 108 percent of the monthly benefit because you delayed getting benefits for 12 months. If you wait until you turn 70 to collect benefits, you’ll get 132 percent of the monthly benefit because you delayed getting benefits for 48 months.

Waiting to collect Social Security benefits add more income to your cash flow in retirement so you don’t have to tap into your retirement savings accounts as much.

As you can see, it could really pay off to postpone collecting these benefits since it could yield more monthly income for your.

Live frugally

Consider reducing your overall expenses to make room for the essentials in retirement like living and healthcare costs.

If you maintain your main home and a vacation home, consider offloading one of them if they are adding an unnecessary drain to your budget.

You could also look for other ways to save money.

For example, you could purchase an older car with cash instead of having a large car note or you could consolidate your high-interest debt into a lower-interest loan.

Other ideas include buying clothing, furniture, and other items second hand instead of brand new.

If you’ll have more time in retirement you could also try couponing to save money on your food budget.

Reduce your housing costs

Housing costs are perhaps one of the biggest expenses you can have in retirement.

Saving on housing can take on many forms which might include downsizing your home, moving in with relatives or getting a roommate.

You could even rent a portion of your home out for temporary visitors on places like Airbnb or VRBO for additional income.

Finally, you can join the growing number of Americans who are moving abroad to low-cost countries in order to retire comfortably.

With a little research, you can find expat-friendly countries that are safe and a good fit for many retirement budgets.

Increase your income

Fortunately, the gig economy affords retirees plenty of options to make extra money these days.

You could drive with Uber or deliver groceries with a service like Instacart and even car for pets via apps like Rover.

You can work part-time in a retail environment or continue your career as a consultant in the field you already have experience in.

Don’t rule out starting a second career or even starting a business, as these are all great ways to earn more money in retirement.

Bottom Line

The idea of outliving your retirement savings can seem scary but there are many solutions out there for almost anyone in any situation.

You’ll need to be creative and research all of your options.  

But, in the end, it will worth it to find a combination of investing strategies and lifestyle adjustments so that you’ll what you need to live comfortably in retirement.

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