Will I Run Out of Money in Retirement?
Understanding Your Retirement Income and How to Make It Last
If you're approaching retirement or already enjoying it, there's probably one question that keeps you up at night: Will my money last?
You're not alone. According to surveys, running out of money is the number one fear among retirees, ranking even higher than concerns about health. The good news? With thoughtful planning and a clear understanding of your financial picture, you can build confidence that your retirement savings will support the lifestyle you've worked so hard to achieve.
Let's walk through the key factors that determine whether your retirement income will last, and what you can do to help ensure it does.
Why This Question Matters
Today's retirees face unique challenges that previous generations didn't have to navigate. People are living longer than ever, many will spend 20, 30, or even 40 years in retirement. Healthcare costs continue to rise. And with traditional pension plans becoming rare, more responsibility falls on your shoulders to manage your own retirement income.
Add in market volatility and inflation, and it's understandable why so many people worry about their financial independence in retirement. But worrying alone doesn't solve the problem. What helps is having a realistic plan based on your specific situation.
Here at Iron Eagle Advisors, we work with families and retirees right here in Charlottesville who ask us this question all the time. While everyone's situation is different, there are some common principles that can help you think through your own retirement income strategy.
Three Key Factors That Determine If Your Money Will Last
- How Much You've Saved
This one seems obvious, but it's worth starting here. The total amount you've accumulated in retirement accounts, taxable investment accounts, and other savings forms the foundation of your retirement income plan. This includes:
- 401(k) or 403(b) accounts
- Traditional and Roth IRAs
- Taxable brokerage accounts
- Savings accounts and certificates of deposit
The amount you've saved sets the baseline for how much income you can potentially generate. But the number alone doesn't tell the whole story, how you manage withdrawals and investments matters just as much.
- How Much You'll Spend Each Year
Many people underestimate their retirement spending. They assume expenses will automatically drop when they stop working, but that's not always the case. While you may spend less on commuting and work clothes, you might spend more on:
- Healthcare and insurance premiums
- Travel and hobbies
- Home maintenance and repairs
- Gifts to children and grandchildren
Getting a clear picture of your actual expenses is one of the most important steps in retirement planning. We often recommend that clients track their spending for a few months to see where their money really goes. This creates a realistic budget rather than relying on guesswork.
Don't forget to account for irregular expenses like replacing a car, major home repairs, or helping family members. These one-time costs can derail your plan if you haven't prepared for them.
- How Your Money Is Invested
The way your retirement savings are invested plays a major role in determining how long they'll last. Generally speaking, you're balancing two competing goals:
Growth: Investments that have the potential to increase in value over time, such as stocks or stock mutual funds
Safety: More conservative investments that are less likely to lose value, such as bonds, fixed annuities, or money market accounts
If you're too conservative and keep everything in cash or bonds, your money may not grow enough to keep pace with inflation. Over 20 or 30 years, inflation can significantly erode your purchasing power. On the other hand, if you're too aggressive with your investments, a major market downturn early in retirement could deplete your savings faster than you anticipated.
Finding the right balance for your situation depends on factors like your age, risk tolerance, income needs, and time horizon. There's no one-size-fits-all answer, which is why personalized planning is so valuable.
Understanding Withdrawal Strategies
One common guideline you may have heard about is the 4% rule. This rule of thumb suggests that you can withdraw 4% of your retirement savings in the first year, then adjust that amount for inflation each year thereafter, and your money should last approximately 30 years.
For example, if you have $500,000 saved, you might withdraw $20,000 in your first year of retirement. The next year, if inflation was 3%, you'd withdraw $20,600, and so on.
While the 4% rule can be a useful starting point for thinking about retirement income, it's important to understand its limitations. This guideline is based on historical market performance and assumes a specific investment mix. Your personal situation may be different, and market conditions change over time.
Some retirees may be able to withdraw more than 4%, while others may need to be more conservative. Factors like when you retire, sequence of returns risk (the order in which you experience investment gains and losses), and your other income sources all play a role.
Don't Forget About Social Security and Other Income Sources
When people worry about running out of money, they often focus only on their investment accounts and forget about other sources of retirement income. For many retirees, Social Security benefits can cover a significant portion of their living expenses.
Let's say your annual expenses are $50,000 and you receive $30,000 from Social Security. That means you only need to generate $20,000 from your savings each year. If you have $500,000 saved, that $20,000 represents a 4% withdrawal rate—which many experts consider sustainable.
Other potential income sources to consider include:
- Pension payments (if you're fortunate enough to have one)
- Part-time work or consulting income
- Rental income from real estate
- Annuity payments
When you account for all your income sources, the pressure on your investment portfolio decreases. This is why comprehensive planning that looks at your complete financial picture is so important.
What Could Go Wrong (And How to Plan for It)
It's worth acknowledging the risks that could impact your retirement security. Being aware of these challenges helps you prepare for them:
Healthcare Costs: Medical expenses can be unpredictable and substantial, especially if you need long-term care. Medicare covers many costs, but not everything. Planning for supplemental insurance and out-of-pocket expenses is crucial.
Inflation: Even modest inflation can significantly impact your purchasing power over a long retirement. A 3% annual inflation rate means that what costs $1,000 today could cost about $1,806 in 20 years. Your retirement plan should account for rising costs over time.
Market Volatility: Stock market downturns are inevitable. The risk is especially significant if a major decline happens early in your retirement when you're also taking withdrawals. This is known as sequence of returns risk, and it can have a lasting impact on your portfolio.
Longevity: Living longer than expected is actually a financial risk. If you plan for a 20-year retirement but live 30 years, you'll need your money to stretch further than anticipated.
The key is to build flexibility into your plan. This might mean keeping an emergency fund, maintaining some growth potential in your portfolio, adjusting your spending when necessary, or considering insurance products that can help manage specific risks.
How We Help Our Clients at Iron Eagle Advisors
Every person who walks through our door in Charlottesville has a unique story, unique goals, and unique concerns. That's why we don't believe in cookie-cutter retirement plans. Instead, we take time to understand:
- What you've saved and where it's located
- What you want your retirement to look like
- Your expected expenses and income sources
- Your comfort level with investment risk
- Your concerns and priorities
From there, we work with you to develop a personalized retirement income strategy. This might include:
- Projecting your retirement income and expenses over time
- Determining an appropriate asset allocation for your investment portfolio
- Planning tax-efficient withdrawal strategies
- Evaluating Social Security claiming strategies
- Considering insurance solutions for specific risks
- Stress-testing your plan against various scenarios
As a family-owned firm, we're committed to providing the kind of personal service and attention that helps you feel confident about your financial future. We're here for the long haul, not just to sell you a product and disappear.
The Bottom Line
Will you run out of money in retirement? The answer depends on your specific circumstances, but the fact that you're asking the question puts you ahead of many people. By thinking proactively about your retirement income strategy, you're taking an important step toward financial security.
Remember, retirement planning isn't about achieving perfection. It's about making informed decisions based on realistic expectations and building flexibility into your plan. Regular reviews and adjustments help ensure you stay on track even as circumstances change.
If you'd like to discuss your retirement income strategy and get a clearer picture of whether your money will last, we'd be happy to sit down with you. There's no obligation, just a conversation about your goals and how we might be able to help.
Ready to Create a Retirement Plan You Can Count On?
Contact Iron Eagle Advisors today to schedule a complimentary consultation.