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If you’re concerned about running out of money in retirement, you’re in good company. That’s because 51% of Americans share that same fear, according to recent data by Empower.
Now, you might assume that a good solution to that problem is to just save more. After all, if you manage to enter retirement with a $2 million IRA, you’re less likely to run out of money than with a $400,000 IRA, right?
Well, not necessarily. Just as someone earning $200,000 a year could end up deep in credit card debt while someone earning $60,000 can go through life debt free, so too is it possible to spend down a multi-million-dollar savings balance if you aren’t careful. So if you’re concerned about your nest egg running out, there are two important things you need to do.
1. Establish a safe withdrawal rate
Setting a specific withdrawal rate for your savings could make your money less likely to run out. For years, financial experts would advise savers to use a rate of 4% per year. That advice fell out of favor for a while as being too aggressive, but has recently been embraced once again based on today’s bond interest rates (since bonds are typically a large chunk of retirees’ portfolios).
You may decide that a 4% withdrawal rate is too aggressive for you and stick to a lower one, like 3%. Or, you may decide to go with a higher withdrawal rate — say, 5%. That wouldn’t necessarily be a poor choice if you’re retiring a bit on the later side.
Either way, though, establishing a withdrawal rate is a good way to keep yourself in check. And if you’re not comfortable establishing a rate yourself, work with a financial advisor to come up with the right number.
2. Keep at least a year’s worth of bills in cash
Just as you need an emergency fund during your working years, so too do you need cash on hand during retirement. The reason? There may be a period when the stock market tumbles and the bond market follows suit. If your nest egg is invested in those assets and you’re forced to take withdrawals from your retirement account at a time when their value is down, you’ll lock in permanent losses. That could increase the chance of your money eventually running out.
On the other hand, if you keep enough cash on hand to cover at least a full year of retirement expenses, you’ll potentially give yourself the option to leave your nest egg untapped during periods of market turbulence. That could help preserve your savings balance, since you won’t be forced to sell assets at a potential loss.
It’s natural to worry about running out of money in retirement. Unfortunately, that risk exists no matter how much money you have. But if you employ these tips, you’ll be doing your part to protect your nest egg and get more peace of mind. And if you’re still concerned, you can always look to work part-time as a retiree. Earning a bit of income puts that much less pressure on your nest egg, so it’s worth considering if your health allows for it.
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