6 Ways to Avoid Running Out of Money in Retirement


Here's a checklist of the key strategies to maintain your spending power for as long as you live. (See also: How Much Do I Need to Retire, How Much Can I Spend?)

Item #1 is only for people who are not yet retired, but the rest apply to everyone.

1. Save More Before You Retire

This is where most people fall down. It seems like every week there's a new report about how people aren't saving enough. If you're going to have money to spend beyond what you get from Social Security (and maybe a pension — if you're one of the lucky few who can still expect one), that money will have to come from your savings.

The two obvious ways to do this are to either spend less before you retire (thereby freeing up money to save) or work longer before you retire. I recommend the former; anyone can spend less, but a plan to work longer can go awry in many different ways (your job could go away, you could get too sick to do it well, etc.).

Useful as it is, though, "just save more" is by no means a complete retirement plan. A complete plan lets you start from where you are and make do with what you've got. Read on.

2. Spend Less After You Retire

Spending less before you retire may be even more important, but that was covered in point #1.

Even though it's not as important, spending less after retirement has the advantage of being very easy — your taxes are lower (because you're earning less), and you're able to be more efficient about your spending (because you're not spending a third of your time at work).

3. Find a Way to Earn Money in Retirement

When you think about it, retirement is a funny idea. It used to be that everyone worked as long as they could. When they couldn't hold up to a full day of heavy labor, they worked shorter hours and switched to lighter tasks.

With the way work is organized (at least in the United States), it's pretty hard to scale back moderately. You rarely have the choice to work half as many hours for half the money. But you probably don't need to earn anywhere near that much money. Just earning a few thousand dollars a year will stretch your retirement savings much further than you might expect.

You can do that a lot of different ways, even something as small as finding a way to make your hobbies pay their way. Wise Bread is full of ideas for earning a little more.

4. Invest for Income

Early in your career, you probably want to invest for maximum growth. But well before you actually plan to retire, you should start shifting some of your investments toward income — because income can be spent without depleting your capital.

That isn't the fashion these days. The modern wisdom of retirement planning is to figure that you can spend some of your capital every year, on the theory that your money only has to last the rest of your life, and you're not going to live forever.

But investing for income, and then holding the line on spending beyond that, is much safer.

5. Monitor Your Assets in Retirement

Since you can't know the future, there's no way to be sure that your portfolio will achieve any particular investment return, nor that it will support any particular spending level. But you can know the recent past.

Your portfolio will decline if the assets you've invested in go down. It will also decline if you're spending capital faster than it's growing.

If you've got a diversified portfolio with a strong income component, you don't need to worry about day-to-day portfolio fluctuations. But year-to-year portfolio fluctuations need to have your attention.

6. Respond to Changes

When you see a decline in your assets (either because your spending is outstripping your income or because the markets have moved against you), find additional ways to economize.

This is really the key action for avoiding running out of money in retirement — if your capital is declining at an unsustainable rate, spend less.

There are a lot of ways to spend less, both on an emergency basis and over the longer term.

This post was prompted by a headline I saw for an article that offered four ways to avoid running out of money in retirement. "Four?" I thought. "I can beat that! I'll write an article about five ways to avoid running out of money in retirement." Then, once I started writing it, I found there were six.

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Guest's picture

Haha I like your reasoning for writing this post. I'm only in my twenties, so I have plenty of time to save for retirement; yet I still feel like with a fixed income I'll be worrying about running out of money and not be able to enjoy my last years to their fullest. I'll most likely be one of those little old miser ladies who pinches pennies everywhere that I can except vacations and presents for grandkids!

Guest's picture

Great tips! I couldn't wait to share it out. So important, if you can, to plan for your retirement days. So many get the thought that it's all fun and parties and forget that there is still a budget needed.

Guest's picture

Great points! I like the point to find ways to make some additional income and responding to changes. You're right in saying that earning just a few thousand dollars can help stretch retirement income. In fact, if you're on Social Security, you can make up to $14,640 and not have it affect your benefits. Responding to change is critical, especially in today's economic climate.

Guest's picture

Actually, once you've reached your full retirement age, you can make as much money as you want and it doesn't affect your benefits. That is, if you start taking money at 62, everything over the limit will affect your benefits. If your full retirement age is 66, then it doesn't. How your benefits and other income are taxed is a whole other issue.

Guest's picture

"I've got all the money I'll ever need, if I die by four o'clock. "
- Henny Youngman

Kentin Waits's picture

Great article -- #2 is key. Reducing expenses and strategically downsizing in retirement is often ignored, but the benefits can't be overstated.

Guest's picture

I always enjoy your posts, Philip. Could you elaborate on the comment, "Just earning a few thousand dollars a year will stretch your retirement savings much further than you might expect"? How little are we talking about, and how much further?

Perhaps this could be a subject for another post. Thanks!

Philip Brewer's picture

It's a rule of thumb that you can spend about 4% of your capital each year, and reasonably expect your capital to grow (or at least hold its value). The converse of that is that it takes capital of about 25 times whatever level of spending you want to support.

So, if you can earn, let's say, $5000 a year in retirement, that's equivalent to putting aside 25 times that amount as additional retirement savings. That is, it replaces $125,000 in retirement savings.

Of course, that's only completely true if you can go on earning $5000 every single year right up until you die. But even if you can't, just a few years of earning a bit—and thereby not spending that amount out of capital—can make the difference between having your capital grow or shrink.

Take, for example, someone who retired in 2007. If he'd needed to sell $5000 worth of stock at the bottom of the market crash in 2008, he'd have locked in a 40% loss. But if he'd earned $5000 that year and preserved his capital, by now it would have recovered, meaning that his capital would be not just $5000 higher—it would be $7000 higher than if he hadn't earned that money.

That's what I meant by "more than you might expect."

Guest's picture

Great, thanks for the reply!

Guest's picture

Seriously, you guys missed the biggest one by far which is having a paid off house. I have advised several thousand clients over the past twenty years and not having debt into retirement especially when it comes to your primary residence is a major factor in not running out of money. Great tips on here, but be sure to add this one as number seven :)

Guest's picture

Helpful tips! I would like to follow all the tips but saving is little difficult factor. I have just enough money around. I really want to secure my retirement life kindly share me how do I save money? May I have to change my lifestyle for that?

Guest's picture

I personally favor number 4 compared to the other choices. Although choice number 1 may seem to be the best choice for most people, I would want to say otherwise. Choice number 1 will give you some money in the long term but whenever your savings dry up, you have nothings else anymore, probably only your social security. So, I suggest that you choose number 4. Investing is the right way to go. Find a good investment opportunity. Invest in a business, invest in stocks, invest in opportunities that you think will give you great benefits in the long shot. That's where I'm going to put some of my hard earned money.

Guest's picture

I am always looking for ways to help me in my retirement years, Help I am there!

Guest's picture

My best tip for living in retirement: live on your monthly income and not whatever amount you have saved. If you can't afford to live on a retirement income, you shouldn't retire. Too many people spend more than they earn while working. This behavior will not support a decent retirement. It's all about the budget!

Guest's picture
Yanni Raz

Nice article. Yeah, all these are great ways of avoiding running money out of retirement. The best thing to do before retirement is find a good financial advisor that can stay with you the rest of your life and continually invest your money to increase your principal balance while still paying you income every month.