Retirement Income: Making Your Money Last a Lifetime

Currently in the U.S., the typical Baby Boomer between the ages of 65 and 74 in the U.S. has financial assets with a median value of about $50,000 in 2019 values, according to the Federal Reserve.  This sum, in addition to your Social Security benefits and any other pensions you will receive, needs to last the rest of your life. How can you turn these assets and income sources into a comfortable retirement? Most retirees worry that they will spend their money too quickly, leaving them destitute at the end of their life. As a result, they are looking for a practical way to make sure their assets last as long as they do.

What can you do to reduce your risk of outliving your money, while still being able to benefit from the money you have managed to put aside for your retirement?

Compare Your Retirement Expenses to Income

Your first step is to total up how much it costs you to live each month, including occasional expenses such as the cost of travel, home repairs, medical bills, and property taxes.  

Then, total up the amount you will receive in Social Security benefits and other pensions, and compare the two figures.  Hopefully, the comparison of your income to your expenses will be very close. If not, you will either have to cut your cost of living, or make up the difference by increasing your income or retirement assets.  Even if the gap initially seems large, don't panic!  There are many ways to make up the difference.

How to Cut Your Expenses

Your first step is to cut your expenses, especially if you do not have a large amount of retirement savings. There are a number of ways to do this. Here are just a few suggestions:

Downsize to a less expensive home, OR, if possible, pay off your current mortgage, OR refinance the mortgage so your payments are much lower.  Any of these changes could save you hundreds of dollars a month.

Switch from original Medicare and an expensive Medicare Supplement plan and change to a Medicare Advantage plan, instead.  This could save you hundreds of dollars a month.

Get rid of your current landline phone service, and use your cell phone, only.

Look for the least expensive plans you can find for cell phone service, cable television, internet access and similar services you use. Eliminate rarely used streaming services and similar small expenses that have a way of adding up quickly. However, try not to eliminate services which you find useful, or that bring you pleasure, or that improve your safety and security.

Consider a Reverse Mortgage

If you want to remain in your current home, and have a large amount of equity in the house, you might consider getting a reverse mortgage which you could use to pay off your remaining mortgage without requiring you to make payments on the loan.  The downside of this is that the principal on the loan will remain, and interest on the loan will accumulate until you move out of the house.  By that time, the interest could have eaten up your equity, not leaving you anything to pass on to your heirs.  

You can avoid the accumulating interest by making small payments on the second mortgage, if you can afford to.  However, before entering into a reverse mortgage, you should thoroughly investigate how much interest would accumulate, how much the monthly payments would be if you wanted to pay the interest off each month, and any other questions you have.

While a reverse mortgage is not right for everyone, for some retirees it is a good way stay in their homes for the rest of their lives.  The older you are when you begin a reverse mortgage, the better choice this is, because there will be less time for the interest to accumulate and eat up your equity. 

How to Increase Your Income

Once you have reduced your expenses as much as you comfortably are able to, then you need to look at your options for increasing your income.

The longer you work before you begin to collect your Social Security and pension benefits, up until age 70 for a worker and the mid-60s for widow's benefits, the more money you will receive each month.  If you are concerned about having a shortfall in retirement income, wait as long as possible to begin collecting these benefits.

If you have already retired, another way to increase your income is to continue to work part-time after you leave your full-time pre-retirement job. There will be a cap on how much money you can earn, at first, if you are working and collecting Social Security simultaneously, prior to your full retirement age. However, this cap goes away once you are at your full retirement age.  This is another good reason to wait to collect your Social Security benefits.  

If you have not retired yet, check the specific age limits at the time of your planned retirement, so you know if you will have a temporary cap on your earnings.  Once you are able to get your Social Security benefits and work without an income cap at the same time, the extra money could make you much more comfortable.  It could also help you continue to build up your savings, so you will have more money available when you no longer are able to work.

Find an Easy Part-time Job

Consider part-time jobs you can do from home or which will not be too exhausting for you.  For example, you may be able to tutor people online or help neighborhood children with their homework, give lessons in some skill you have (music, art, cooking, etc.), or sell your crafts or artwork.  Depending on your life and work experience, you might also be able to help people prepare their taxes, or deal with common computer problems, or be a dog walker or pet sitter.  If you like to write, you could consider writing online articles for a site like TextBroker.

Do Not Get Scammed!

You should not have to pay anyone anything in order to get a part-time job from home.  If someone asks you to buy something, it is a scam.  Start your own little home business, or work for a reputable company.  Check it out carefully with the Better Business Bureau and by looking for online reviews. 

Decide How Much Money to Withdraw from Savings Each Year

If your Social Security Benefits and pension will not cover your expenses, you can further enhance your income by using a small portion of your savings each month to make up the difference.

The younger you are when you begin dipping into your savings to cover expenses, the less you will be able to use, so wait as long as you can before taking this step. 

If you are in your 60's, it is advisable that you begin by taking out no more than 3% a year from your savings.  Each year, you can take an additional .03% of the total remaining balance to help compensate for inflation. Doing this, the money should last as much as 33 years or more, depending on the interest, dividends and asset appreciation over the years.  If you have a 401(k) or an IRA, you will not be required to start taking minimum distributions from those accounts until you are in your 70s (they periodically increase the age of these required distributions).  However, if you want to begin to enjoy the benefits of your savings before that age, and you feel you can afford it, you are not required to wait that long.  

If you are able to wait until you are in your 70's before you start dipping into your financial assets, you could begin taking 4% a year, increasing it by .04% of the total remaining balance each year.  In this way, your money will last another 25 years or more.  Make sure you take out at least enough to meet the Required Minimum Distribution, so you do not get hit with a surprise tax bill on your assets. 

Finally, if you are in your late 70s or older before making withdrawals, or if you have a reason to believe you are nearing the end of your life, you can start removing 5% a year, increasing the amount by .05% a year of the total remaining balance.  In this way, your money could last 20 or more years, which will meet the lifetime needs of most people.

For a more detailed approach on how to make your money last during retirement, you will want to read, "How to Make Your Money Last: The Indispensable Retirement Guide." (Ad) It delves much deeper into the specifics of making sure you have a financially secure retirement.  

Don't Forget to Set Aside an Emergency Fund

Life comes with surprises, as we all know.  Over the years, you may need to purchase a new car or repair the old one, or you may have an adult child move in with you because of a setback in their life.  You may develop an expensive health problem, need to travel to see a sick relative, or decide to help a grandchild.  You may even need to hire a caregiver for a short time.  If you begin to dip excessively into your total assets to cover these expenses, you could face a major shortfall in the future, if you are not prepared.

As a result, it is good advice to continue to set aside a portion of your income in an emergency savings account.  In fact, if you have adequate financial assets at the beginning of your retirement, you may find it helpful to set aside at least $5,000 to $10,000 in an emergency fund from the very beginning, so you are not forced to sell stocks when they are down.  Add to this fund whenever you can, and only remove money from it in a true emergency.  This extra emergency account will reduce your fear that you might need to dramatically cut the amount you can safely remove from your retirement savings each month.

Interesting Statistics About Retirement Savings

About 75% of grandparents have admitted that they are willing to offer financial help to their families. (Make sure your own expenses are covered first, though. Supporting adult children is one of the most common drains on the finances of retirees.)

About one-third of retirees have more financial assets 17 to 18 years AFTER they retire than they did at the beginning.  This is because they often continue to save money and only use a small portion of their dividends to cover their expenses, which allows their assets to continue to grow.  This means that, with careful planning, you can become more financially secure the older you get. 

Many retirees overestimate what their expenses will be after they retire.  After the first few years, they may find that they are not traveling and entertaining as much as they did when they were younger.

Since the recession of 2008, there has been an increase in the purchase of multigenerational homes.  Because housing averages about 35 percent of the spending for people over age 65, sharing a home with an adult child can save a retiree a lot of money. 

Another helpful guide to financial planning for retirement is the book "The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime." (Ad)  Good planning is essential in your quest to not outlive your savings.

Bottom Line:  If you cut your expenses, work as long as you can, build your pensions, and grow your savings, you can have a comfortable retirement.  Most of the recommendations in this article came from an AARP Magazine article dated April/May 2021.

After doing a good job of planning your retirement income, you can reward yourself with a gift for yourself or someone you care about.  

You can find great gifts for retirees and your family, at my Etsy Store, DeborahDianGifts.  Check it out here:    http://www.etsy.com/shop/DeborahDianGifts

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Your Retirement Savings Can Last for Decades - Learn How

The single issue which concerns nearly everyone on the brink of retirement is how they can be sure the money in their retirement account will last for the remainder of their life.  This is a significant and understandable reason to worry.  No one wants to reach their 80's or 90's and realize they have run out of money.  As a result, AARP teamed up with personal finance expert Jane Bryant Quinn to come up with a simple way to make sure your money lasts as long as you do.

Start with Your Guaranteed Income

Almost everyone in the United States will have a certain amount of guaranteed retirement income, even though it may not be enough for you to completely depend on.  The most common source of this income is Social Security. However, if you worked for a school or government agency, you may have a state or federal pension instead.  In addition, you may have a private pension, an annuity, income from rental property or some other source of regular, reliable income.  If you have not yet retired and your guaranteed retirement income seems to be very small, you may want to work a few more years in order to enhance the amount of guaranteed income you will have for the rest of your life.  At age 70, workers will have maxed out the amount of Social Security benefits they can receive; at age 65, their spouse will have maxed out the amount they can receive in spousal benefits.  There is no point in waiting to collect your benefits past these ages.

If your savings and assets are limited and your Social Security or other pension is small, arrange a personal appointment with someone in your local Social Security office and with your Department of Social Services.  You may be able to increase your guaranteed basic income and benefits by qualifying for Supplemental Security Income (SSI), SNAP (food stamps), or low-cost senior housing assistance.  These extra benefits are available to low income citizens and you have paid for them through your taxes, so there is no reason not to take advantage of them.  If you qualify, they can go a long way towards helping you have a modest, but survivable retirement.  

Total Up the Amount in Your Savings and Retirement Accounts

Once you have worked as long as possible and secured the highest level of Social Security benefits you can, it is time to evaluate how to make the money in your retirement savings accounts last the rest of your life.  If you have been saving a portion of your income in a 401(k) or IRA during your working years, you will be able to use income from that money to supplement your Social Security, pension or other sources of guaranteed income.  Total up the amount of cash you will have to work with upon retirement.

In addition to the money in your retirement savings accounts, you may decide to sell your current residence and downsize to a smaller home when you retire.  In some cases, this move may also give you extra cash which can be used to supplement your retirement income.  There may also be other non-income producing assets you can sell, such as coin collections, jewelry you no longer wear, or similar valuables. Pool together all the cash you can, total it up, and see how much money you will be able to put to work.

Set Aside a Cash Cushion

Take a portion of your cash savings and set it aside for emergencies, upcoming expenses, or large medical bills. If you live another 20 to 30 years after retirement, it is likely you will need to tap into this cushion occasionally to cover surprise bills you may have above your normal monthly expenses.  Sooner or later, you may have to replace a hot water heater or pay a large medical deductible, and you want to be prepared. You do not want to deplete your other assets in order to do this.  Use this emergency cushion carefully. You should avoid burning through it during the first few years after you retire, especially on something like a big trip.

If there is a dream trip you want to take after you retire and you feel you can afford it without wiping out your retirement savings, set aside some travel money at the beginning of your retirement and do not exceed this budget.  Remember, it will be difficult, if not impossible, to replace any money you spend after you retire.  Use those funds carefully.

Invest the Remainder of Your Cash 

Jane Bryant Quinn, the AARP expert, recommends that the ideal way to invest your savings and assure yourself of an income for the remainder of your life is to invest half of it in low-cost index mutual funds or exchange-traded funds that hold stock in large companies and put the other half in Treasury bond funds.  (As an aside, this blog has reported in the past that Warren Buffet also recommends that retirees invest a substantial portion of their retirement savings in low-cost index mutual funds.  It seems like good advice for most people.)

If you are unsure about which investments would be right for you, you may want to purchase Jane Bryant Quinn's book, "How to Make Your Money Last."  It offers excellent advice.  

Follow the Four-Percent Rule

The four-percent rule is one which many financial experts recommend for most retirees.  This system allows you to use four percent of your retirement savings the first year after you retire.  You can increase your withdrawal rate by the amount of inflation each year.  For example, if you have $100,000 invested, you can spend $4,000 the first year.  Then, increase the amount you withdraw by the inflation rate for that year.  If inflation is 3 percent, you can withdraw $4,120 the next year.  Even if the market has ups and downs, this system should assure you that your money will last 30 years or longer, because your withdrawals will be at least partially replaced by the dividends and interest you receive on the principal.

If you decide to avoid the stock market and put your money only in bonds and CDs, you will have a lower return and may have to change the four-percent rule, discussed above, to a three-percent rule.  This works exactly the same, but you start with a lower withdrawal rate of 3 percent.  In other words, for every $100,000 invested, you can withdraw $3,000 the first year.  If inflation is 3 percent, you can withdraw $3,090 the next year.  This very conservative approach is another way to assure yourself that you will have supplemental income for the remaining years of your life.

The one thing you do NOT want to do is to begin retirement by taking more than four percent from your retirement savings, unless you have stock investments which are doing exceptionally well and you feel certain you are not putting your future financial security at risk. Even then, you should not take more than 4.5 percent.  If you withdraw more than that, you must be prepared to also cut back your withdrawals during times when the stock market falls. If you do not want your income to fluctuate in this way, stick to a withdrawal rate of 4 percent or less.

Rearrange Your Lifestyle to Fit Your New Income

Now that you know what your income will be from your retirement savings, add that to your Social Security or pension.  Compare the total to your realistic retirement budget.

If your Social Security and other guaranteed income, when added to four percent of your retirement savings, totals less than your current income, you may have to make some changes to your lifestyle.

As mentioned above, you may need to downsize to a smaller, less expensive home.  The advantage of this is that other housing related expenses, such as property taxes, utilities and maintenance, would also be lower.

You and your spouse may also find it advisable to adjust to sharing one car, or one of you may decide get a part-time retirement job.  You need to make adjustments so your retirement expenses and income match.

If it seems impossible to match your income to your desired lifestyle at the age when you planned to retire, you may decide it would be best to wait to retire until you have paid off your mortgage or until your Social Security benefits or pension would be larger.

It will be much easier and less stressful to start out retirement with a lifestyle which fits your new income, rather than try desperately to maintain your current lifestyle, even when your income and assets do not justify it.   A few hours of planning will save you years of grief in the future.

Make Sure a Surviving Spouse can Maintain this Lifestyle

What happens when you or your spouse passes away?  Will the other spouse be able to survive financially?  Before you finalize your retirement plans, make sure both you and your spouse will be financially secure even after one of you dies.  Calculate the guaranteed survivor income plus the investment income each of you would receive individually after the death of a spouse. Make sure this reduced income will cover the fixed expenses each of you would still have for items such as mortgage payments, property taxes, utilities, car payments, food and medical bills.  If the income of either of you would not be adequate to survive individually, come up with a plan to compensate for the difference.

You may want to start your retirement off by spending even less than the 4 percent rule would allow.  This would allow your assets to grow. Purchasing life insurance policies might also be an option for some couples.  Plan ahead and decide how each of you will deal financially with being widowed. This will reduce some of the stress when the time comes.

Jane Bryant Quinn goes through all this in even greater detail in her helpful book, available here from Amazon, "How to Make Your Money Last." 

Relax and Enjoy Your Retirement

Financial worries have been shown to increase the risk of death, so it is important for every couple and individual to carefully evaluate their situation before retirement.  Once you have made the necessary adjustments so you are confident your money will last the rest of your life, you will be able to relax and truly enjoy your remaining years.

If you want to learn more about financial planning, Social Security, Medicare, where to retire, common health problems and more, use the tabs or pull down menu at the top of the page to find links to hundreds of additional helpful articles.

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