You're officially retired.
You don't have to wake up to that annoying alarm clock anymore.
The sun is shining, and the only thing you have to worry about is when you get to take your afternoon siesta.
Then it hits you…
Can I really afford this lifestyle?
Did I save enough?
Do I have the right investments?
Do I need to learn how to make fast money to save more before I really do this?
Your calmness quickly vanishes and is replaced by an overwhelming panic.
You can't get the sickening thought out of your head — “Am I going to outlive my money?”
It's okay. Take a DEEP breath and exhale.
Seriously. Do that now.
One of the most common concerns about retirement is the possibility of outliving your money.
With people now living well into their 80s, and often into their 90s, it’s a legitimate concern.
In fact, my oldest client just recently celebrated her 92nd birthday. You go girl!
But rather than worrying about it, try some of these strategies to make sure that you’ll have plenty of money available throughout your life.
There are 16, so choose the ones that will work best for you.
1. Plan On a Bigger Retirement Portfolio Than You Think You’ll Need
When it comes to retirement planning, never imagine that you’re going to get off easy. Better yet, think in the opposite direction – and plan on creating a bigger retirement portfolio than you think you’ll need.
No complicated strategy here; just decide how big your portfolio needs to be in order for you to retire the way you want, and then increase it.
For example, you can decide to increase it by a certain percentage — say 25%. If your projections indicate that you’ll need $1 million to have the kind of retirement that you want, increase the target for your portfolio to $1,250,000.
That will provide you with the extra wiggle room you'll need in case your living expenses are higher than you expect, or other income sources turn out to be less generous than you had planned on.
2. Invest For Inflation – Before and During Retirement
Along with expected rate of return on your investments, inflation will be the biggest variable in your retirement planning. And not only will you have to invest for the effects of inflation between now and the time you retire, but you also have to continue doing it for the rest of your life after retirement.
Inflation can do magical and destructive things to an investment portfolio, especially over a number of years. While a 2% inflation rate won’t hurt you much a year from now, that same rate applied over a decade will reduce your purchasing power of something greater than 20%.
Now we’re talking about real money!
You will have to invest in anticipation of that outcome, and there are different ways to do it. If you think that there may be a sudden bout of high inflation (10% per year or more), then you may want to move a small but healthy percentage of your portfolio into commodities, such as gold stocks and energy stocks (mutual funds and ETF's will do just as well).
If you think that inflation will continue at the slow pace of the past 20 years, you will be better off with growth stocks, since they tend to grow especially well in low inflationary environments.
There’s no way to know for certain what inflation will do over the next 20 or 30 years. But if you’d like to take a stab at it, head over to the Bureau of Labor Statistics‘ CPI Inflation Calculator and spend some time playing with the numbers. It can’t tell you what inflation will do over the next 20 years, but it can show what it’s done over the past 20 years, and give you a rough ballpark estimate.
3. Invest Beyond Your Retirement Plan
In #1 above we talked about planning to have a bigger retirement portfolio than you think you’ll need. You can do this by putting some money into investments outside your retirement plan. This is of course particularly well advised if you reach a point where you have maxed out your allowable retirement plan contributions.
Even though money accumulated in a non-tax-deferred savings plan will not have the obvious tax benefits, it’s still a way to grow your money in the years ahead.
In reality, any money that you have saved and invested will be available for retirement purposes when the time comes.
It won’t matter at all that the account doesn’t have the word “retirement” on it.
There’s also an advantage to having some of your money saved outside of retirement plans. If you have a need for a significant amount of cash between now and retirement, you can tap a non-retirement account and avoid tax consequences. And, it will keep your retirement investments for their intended purpose.
In our own portfolio, we have a joint account that holds some individual stocks. I've also opened accounts with peer to peer lenders Prosper and Lending Club. (You can see how I'm doing here: Prosper vs. Lending Club Experiment)
Over and above those accounts, I've also invested heavily in businesses. All of these are outside my retirement account, but will definitely be there for me during retirement.
4. Be VERY Careful Investing in Bonds – For Now
Conventional wisdom is that you should invest in a portfolio that is diversified between stocks and bonds. But we’re living in a time when bonds aren’t quite what they have been in the past. At today’s interest rates, bonds could prove to be losing investments.
There are at least three reasons to be wary of bonds in the current economic environment:
- Interest rates are at historic lows, meaning that it will be very difficult to earn enough interest just to cover inflation.
- Should interest rates rise from the current very low levels, your bond portfolio – particularly long bonds – will get clobbered.
- In the past 20 or 30 years, the performance of bonds has been largely paralleling stocks, which means that they may no longer be a true diversification.
A historic shift in the direction of interest rates can see your bond holdings tank at some point in the future, increasing the chance of outliving your money.
If you do invest in bonds, keep the following tips in mind:
- Emphasize capital preservation over income. The primary purpose of your bond holdings in a low interest rate environment should be capital preservation. The best securities for this purpose will include money market funds, certificates of deposit, and Treasury bills with maturities of one year or less. You won’t make much money on it, but you won’t lose any money either.
- Keep maturities to 10 years or less. If you do decide to pursue higher rates with longer maturities, make sure that they’re 10 years or less. Longer-term bonds are much more sensitive to the increases in interest rates that will lower the market value. Debt securities with maturities of more than 10 years tend to perform a lot like stocks – and that is not the purpose of bonds.
- Favor TIPS bonds. Treasury Inflation-Protected Securities (TIPS) are US government securities that not only pay interest, but also provide protection against inflation. You not only earn interest, but you also get periodic adjustments to the value of your securities based on changes in the Consumer Price Index (CPI). You can purchase TIPS directly from the United States Treasury (with no broker fees) through the Treasury Direct website.
5. Start a Roth IRA Today (like right now)
In case you didn't know this, I'm madly in love with the Roth IRA. Don't believe me? Check out the Roth IRA Movement and you'll see how much I love it.
A Roth IRA is one of the best strategies to avoid outliving your money.
For starters, distributions from a Roth IRA are tax-free as long as you are at least 59 ½ years old, and have participated in the plan for at least five years. The less you have to pay in taxes, the more that you will have available to provide for yourself in retirement.
Another huge benefit is that a Roth IRA is not subject to Required Minimum Distributions (RMDs), the way virtually all other tax-sheltered retirement plans are. This means that you will not be required to take distributions starting at age 70. That will allow you to keep the money in your plan, and to allow it to grow even as you are depleting other retirement plans through annual distributions.
A Roth IRA can represent a Retirement Part II – the income source that you rely on later in your retirement years when your other accounts are starting to run dry. There’s probably no better back-up plan than a Roth IRA.
Interested in opening a Roth IRA? You can open a free account with Ally Invest.
6. Build Tax Diversification Into Your Overall Retirement Plan
Creating tax diversification in retirement primarily means that you will have at least some of your income derived from nontaxable sources. While it’s generally assumed that your income – and therefore your income tax rates – will be lower in your retirement years, that may not be the case for the following reasons:
- With a combination of distributions from your retirement plans, other investment income, Social Security, and even some earned income, it’s possible that you could earn more money in your retirement years than you’re making now.
- Income tax rates could be much higher by the time you retire than what they are right now.
If you are putting money into a Roth IRA, you are already setting yourself up for tax diversification, since distributions from the plan are tax-free. Investments held in non-tax sheltered vehicles can also help.
Though investment income on those assets will be taxable, you can take distributions from them without creating tax consequences. And once again, the less money you are paying in income taxes, the less likely it is that you will outlive your money.
7. Grow Your Emergency Fund Over Your Lifetime
The conventional wisdom is that you should have an amount equal to 3 to 6 months of living expenses sitting in an emergency fund. While that may be sufficient during your working years, it may not be nearly enough in retirement.
Once you retire, your emergencies may be bigger than what they are right now. You could have medical emergencies that are not covered by health insurance. You may also have to help an adult child. And sooner or later, you’ll have to buy new car, or make major repairs to your home.
Your emergency fund should be large enough to accommodate those expenditures. For that reason, you should steadily grow your emergency fund as you approach retirement. You should aim to have enough money that you will not have to make a large, unscheduled withdrawal from a tax sheltered plan, which might result in higher income taxes.
In that way, a large emergency fund will also be part of your retirement tax diversification scheme.
8. “Invest” In Your Health
One of the biggest concerns people have in regard to outliving their money is the condition of their health. The better your health is, the less likely it is that you will outlive your money. This is because you will not have large health-related expenditures that can drain a retirement plan.
Good health can also leave you in better physical condition in the event that you want to continue working past your formal retirement age. The state of your health in retirement has clear financial implications.
Investing in your health will mean adopting better lifestyle habits now. Take the time to make better nutritional choices, to incorporate regular exercise into your routine, to lose a few pounds if you need to, and to give up negative health habits, like cigarette smoking or excess consumption of alcohol.
9. Consider Purchasing an Annuity
It seems that every financial journalist and fee-only advisor I come across hates annuities, but unfortunately many of them don't understand them well enough to be giving advice on them.
I admit that annuities can be very confusing, but they also offer some very attractive income benefits that will prevent you from outliving your money – guaranteed. Show me a stock or a mutual fund that can promise that?
Immediate annuities, indexed annuities and certain variable annuities offer income benefits that can either be setup to pay for an individual or a couple (for a joint payout, the benefit is usually lower). How much you get all depends on the insurance company, type of annuity, amount you have to invest, and when you start taking the money.
Fixed-indexed annuities (sometimes referred to as equity indexed annuities) have been hot sellers for the past couple of years, offering attractive features such as principal protection and guaranteed income benefits. Like any other investment (and annuity), they come with pros and cons which I outline in this post: What You Need to Know About Indexed Annuities.
I am definitely a fan of annuities in the right situation. Unfortunately, there are quite a few shady advisors who sell them just to make a commission.
10. Buy Less House Than You Can Afford
The single biggest step that you can take in cutting your expenses is to buy less house than you can afford. The conventional wisdom is that you should buy the most expensive house you can afford, and your financial situation will grow into it. But that’s not a good idea when it comes to retirement planning.
The house that you buy will affect your spending patterns for the rest of your life. A larger, more expensive home will cause nearly all other expenses in your life to be higher – property taxes, utilities, insurance, repairs and maintenance, and even the type of car you buy.
In addition, since a house payment is a fixed expense, it will be very difficult to lower it after the fact. Buy on the conservative side, and you’ll have more money for everything else, including saving for retirement. Instead of planning on buying your dream home, plan on preparing for your dream retirement.
11. Plan to Retire to Where Living is Cheap
One of the best ways to keep your living expenses low in retirement is simply to plan to retire to an area where the cost of living is a low.
This can be especially important if your retirement investments will be quite as high as you hope.
By moving to an area where the general cost of living – and especially housing – are cheap, you’ll need less money to live on, lowering the chance of outliving your money.
12. Set Your Kids Up For Success
We often think of preparing for retirement and sending your kids to college as competing interests. In reality, one supports the other – mostly that sending your kids to college complements your retirement efforts.
The sooner and better your kids are able to provide for themselves financially, the less they’ll need to rely on you to support them in their adult lives.
This is no small problem. An increasing number of young adults are unable to enter well-paying career fields, and remain dependent on their parents well into their 30s.
By giving your kids a solid education – in an economically relevant career field – you will be equipping them to take care of themselves, rather than relying on you and your spouse to provide for them.
13. Prepare to Have a Medicare Supplement
One of the biggest outliving-your-money scenarios is a health-related crisis. Such a crisis could drain even a very large retirement portfolio in short order. The best protection you have from facing this outcome is to make sure that you have adequate health insurance.
Medicare covers people with basic health insurance starting at age 65, but it doesn’t pay 100% of your healthcare costs, and there are exclusions. In order to be sure that everything is covered, you should get a Medicare supplement. That will cover most of what Medicare will not, and can prevent you from having to dip into your retirement savings ahead of schedule.
Medicare supplement policies are standard in most states, and you cannot be declined for coverage if you apply within six months of turning 65. Though this will raise the cost of living in retirement, it will be money well spent – the kind that can prevent the very type of financial disasters that can see you outliving your money.
14. Create a Post-Retirement Career
Having some sort of career or business that you can carry into retirement can be one of the best financial diversifications you can have. The income that you earn in such a venture can mean that you’ll require less money from your retirement investment plans.
In addition, a post-retirement career can be a valuable source of income during a time of high expenditures, times of uncertainty, or times when the stock market is doing a deep dive. If you can live on your post-retirement career for a time, you’ll have more of your capital intact to take advantage of the rise in the stock market once the downturn ends.
15. Plan on Semi-Retirement For the First Few Years
On a similar note, an excellent capital preservation strategy is to plan on semi-retiring during the first few years of your retirement. If you are healthy enough – and most people certainly are in their 60s – you can at least supplement your income by working on a part-time basis.
The idea is to rely more on earned income in the early years, and to save your investment capital to cover you in the later years when you may not have either the desire or the ability to continue working at all.
You can think of it as taking your retirement in stages – retiring from your lifelong career, semi-retiring for the first few years after, and then fully retiring when you decide that you’ve had enough of working for a lifetime, and are confident that your retirement investments are sufficient to carry you for the rest of your life.
16. Cut Your Expenses – Permanently
So far we been talking primarily about increasing your savings and investments in order to prevent outliving your money. But there’s a whole lot you can do on the expense side that will accomplish the same objective.
Cutting your living expenses helps you to accomplish two goals:
- It frees up your income now to that you’ll have more to invest for retirement later, and
- It reduces the amount of income that you will need to support yourself in retirement.
If you’re serious about not outliving your money, cutting your expenses on a permanent basis has to be built into the equation.
Using just a few of these options should keep you ever outliving your money.