Afraid of Outliving Your Retirement Savings? Here Is What You Need to Know

Written By: Brad Cast

Outliving your retirement savings is a concern that many retirees face. You spent your entire working life saving so that you could be comfortable in retirement, and now you find yourself worried about the prospect of running out of money before running out of time. While it may sound frightening, there are ways for you to plan ahead and avoid any issues.

Nonetheless, living within your means can be difficult if you only depend on Social Security, pension, and/or personal savings. You might have saved for 25 years of retirement, but you could end up living much longer. Though this is certainly a reason to celebrate, longevity comes at a cost — one that you may not have considered ahead of time.

Every additional year puts more strain on your retirement finances, which can make financial planning very stressful. Moreover, if you’re nearing retirement, you may not have a lot of time to reexamine your investments or saving strategy. Fortunately, we can advise you on how to make the most out of your life savings and discuss the best ways to avoid outliving your nest egg in retirement.

Calculate Your Income Percentage

It is never too early to start planning for retirement. However, once you have reached the middle or late stages of your career, you will likely have a better idea of the kind of lifestyle you want to live in retirement. This will help you calculate the percentage of your income to put toward investments and retirement savings.

For example, if you want to have a retirement income of $100,000 per year, you must calculate the total funds you need going into retirement. A standard formula is to take your current annual income and divide it by 3%-4%. In doing so, you will find that you need between $2,500,000 and $3,334,000 in savings and investments by the time you’re ready to retire. The percentage reflects the amount of annual income that you hope to receive from your investments without taking away from the principal amount.

Generally, anticipating a lower percentage is a good strategy to ensure that you don’t risk outliving your retirement. You will aim to save more for retirement, while also predicting that your available assets will provide lower liquidity and return each year. However, if you believe that your assets will provide a higher return, you might build your plan around a reasonable percentage on the higher end of the projected income spectrum, thereby reducing the total amount you need to have on hand by the time you leave the workforce.

Once you have a number in mind, the rest comes down to assessing the amount of time you have to reach your retirement savings goal. Perhaps you plan to retire in 10 years and currently have $1,500,000 in retirement savings. Your goal (based on the retirement income calculation above), is to have $2,500,000 saved by the time you retire. If you currently make $100,000 per year and anticipate a pre-retirement APY of 5%, you will need to put about $375.38 per month (4.5% of your income) toward your retirement savings to meet or exceed your goal.

Evaluate Your Lifestyle Goals and Needs

The formula above assumes that you want to live the same lifestyle when you retire as you live now. However, many people are more than happy to make cutbacks during retirement. Alternatively, others want to enjoy the fruits of their labor as much as possible. Therefore, it’s vitally important that you assess how you want to live after you retire.

For example, you may wish to downsize your housing, especially if you have a large family home. Once children have moved out and you’re ready to retire, you may be much more comfortable in a smaller (and less expensive) space. Not only can this strategy reduce your retirement expenses, but selling larger property can also provide you with more funds for your retirement savings. You may even be able to take advantage of retiring to a state with a low state income tax.

On the other end of the spectrum, you may wish to spend your retirement traveling and generally living a more expensive lifestyle than you did before. Upgrading your lifestyle increases the risk of outliving your retirement savings — unless you plan accordingly. Thus, if you want to live a “better” lifestyle during retirement, you will need to devise a more aggressive savings strategy now.

Think About Estate Planning

Finally, if you have heirs, you will need to consider the size of the estate you want to leave behind. Whether it takes the form of savings, real estate, or other assets, the reality is that leaving more for your heirs requires you to be more careful with your retirement savings. You could risk outliving your retirement savings if you set aside a large sum or trust for your beneficiaries without planning accordingly.

There is no universal formula for planning your estate, as it varies based on your income, available assets, life insurance, long-term care insurance, number of beneficiaries, retirement expenses, and general estate planning goals. For this reason, you should talk to your financial advisor to examine how you can leave a healthy nest egg for your heirs and beneficiaries without taking too much away from your retirement savings.

The Bottom Line

Outliving your retirement savings is always a possibility but putting a plan into action ahead of time can help you avoid financial risk. The most important factors are your ideal lifestyle goals for retirement, your capacity to save during your working years, your anticipated retirement income, and your estate planning goals. By taking all these factors into consideration, you can greatly reduce and strive to eliminate the risk of running out of time before running out of money.

We hope you found this guide on how to avoid outliving your retirement savings useful! If you’d like more personalized financial advice or assistance with your retirement plan, be sure to contact Merit Financial Advisors today!

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.