How to Plan for a Comfortable Retirement & Help Avoid Running Out of Money

Retirement is often seen as a well-deserved reward after years of hard work, but the biggest challenge lies in ensuring that your savings last as long as you do. The most pressing question for many is: How can you retire comfortably without running out of money along the way? The answer lies in anticipating challenges, staying ahead of potential financial pitfalls, and tailoring your retirement approach to keep your savings working for you.

To achieve a sustainable retirement, understanding your retirement spending and income needs is crucial. Many people enter retirement with little understanding of their actual spending needs, or the amount of income required to maintain their lifestyle. While some factors, such as current spending habits, can help project future needs, there are unpredictable variables like inflation, market downturns, and unexpected healthcare costs that can derail even the best-laid plans. If these potential setbacks aren’t accounted for, your retirement savings could deplete faster than anticipated.

For example, consider John, who retired in 2007 at the age of sixty-five with $550,000 in savings. John withdrew only $25,000, about 4.5% of his savings, this first year of retirement to cover his expenses. However, the financial crisis of 2008 dealt a severe blow to his portfolio, reducing his balance by 40% in just two years. By 2009, John’s savings had dwindled to $280,000, and with his planned annual withdrawals of $25,000, he faced a high risk of running out of money . This situation left him with less principal to grow his investments, illustrating how a failure to plan adequately for market downturns and future needs can jeopardize long-term financial security.

To understand your spending and income needs, consider creating a retirement budget with periodical reviews. This budget should account for both essential and discretionary expenses, with a built-in cushion for unpredictable factors like market downturns and rising healthcare costs. Additionally, consider working with a financial professional to stress-test your plan using different market scenarios, aiming to ensure your savings will support your lifestyle over the long term, even in the face of unexpected challenges like inflation or economic downturns.

Rethinking common retirement strategies, like the “4% rule,” is essential to help protect your savings. This widely accepted rule suggests withdrawing 4% of your total portfolio annually to avoid running out of money. However, recent research by Morningstar indicates that a safer withdrawal rate might be closer to 3.3%. This adjustment considers modern challenges such as inflation, rising healthcare costs, and increased life expectancy.

The statistics around longevity are striking: According to the Society of Actuaries, there is a 50% chance that at least one member of a 65-year-old couple will live to age 93, and a 25% chance one will reach 97. This means one partner may need financial resources for nearly three decades of retirement. An increase in withdrawal rates above 3% significantly raises the risk of depleting retirement savings too soon, underscoring the importance of a conservative approach to spending.

Accounting for healthcare costs, especially long-term care, is essential for retirement. Healthcare expenses represent one of the most unpredictable and costly aspects of retirement. In California, according to Genworth’s 2023 Cost of Care Survey, the median cost for a semi-private room in a nursing home is over $9,000 per month. These costs have surged over recent decades, placing immense pressure on retirees’ finances. Without planning for such expenses, retirees may find themselves depleting their savings much faster than expected.

So, how can you plan for these rising costs?

Start by exploring long-term care insurance, which can help cover the cost of nursing homes, assisted living, and in-home care. Consider building a healthcare fund within your retirement savings that accounts for inflation and the rising cost of medical care. Additionally, review Medicare and supplemental health plans to understand what is and isn’t covered. Working with a financial professional to project your future healthcare needs and integrate those costs into your broader retirement plan can help protect your savings and prepare for the unexpected.

Building a resilient retirement strategy is key to long-term financial success in retirement. To build a resilient retirement strategy, start by defining your specific financial goals, First, decide the annual income you’ll need to maintain your lifestyle and cover essential expenses. Next, implement a diversified investment plan that includes a mix of stocks, mutual funds, bonds, and other assets, to reduce risk. For example, allocate 60% of your portfolio to equities for growth and 40% to fixed-income investments for stability. Finally, regularly review your goals and adjust your withdrawal rates, aiming for a sustainable rate around 3-4% of your portfolio, depending on market conditions.

If you’re concerned about running out of money in retirement, another investment opportunity to explore is fixed annuities, which ensure a guaranteed stream of income for life and provide added protection against longevity risk. Work with a financial professional who will monitor and stress-test your plan and help keep your goals on track, even when the market or your personal situation changes.

In conclusion, thoughtful planning is crucial for navigating the many challenges of retirement. Retiring comfortably without the fear of outliving your money requires careful preparation and regular adjustments to your strategy. By understanding your spending needs, staying informed about potential risks, and making strategic decisions about your withdrawal rates, you can better position your savings to last throughout your retirement. Retirement is not just about the amount you save but also about how well you plan for the years ahead.

If you’re unsure about your retirement strategy or need guidance to create a plan that aligns with your goals, Liberty Group can help. Our team of experienced financial professionals is here to assist you in navigating the complexities of retirement planning. Don’t leave your future to chance—reach out to Liberty Group today to schedule a consultation and take the next step toward a confident retirement.