Yahoo Finance 5 ways to avoid going broke in retirement
Retiring can be scary. Even if you come in with decent savings, you may be worried about ending up cash-strapped – or, worse yet, out of money completely.
In fact, 63% of Americans say they're more worried about running out of money than actually dying, according to a recent Allianz Life study, with concerns about inflation, Social Security and taxes contributing to the fear.
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The good news is that with careful planning, you can avoid going broke in retirement. Here’s how.
1. Have a budget
It’s important to establish a budget in retirement, especially early on, when you’re adjusting to a new (and potentially lower) income. Start with your essential expenses, like shelter, food, and healthcare and plan carefully to avoid any surprises. A report from the Employee Benefit Research Institute (EBRI) revealed that couples enrolled in a Medigap plan with average premiums will need to have saved $351,000 to have a 90% chance of covering their medical expenditures in retirement.
The good thing about being retired is that you don’t have to worry about setting a portion of your income aside for retirement. But you also want to make sure you’re spending within your means.
2. Don't overspend on housing
In 2022, housing was the biggest expense for the average retiree household at $11,186, says the Bureau of Labor Statistics — more than healthcare ($7,505) and transportation ($8,065). If you’re able to keep your housing costs down, you can free up money for other expenses and buy yourself some breathing room.
Consider downsizing in retirement if you no longer need the same square footage you did when you were working. Also consider relocating to an area where property taxes are lower and insurance costs aren’t as high. Many seniors enter retirement with a paid-off mortgage, so you may want to focus on peripheral housing expenses to lower your costs.
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3. Manage your nest egg wisely
The average amount in retirement accounts of U.S. retiree households is around $500,000, according to the Federal Reserve data. The median amount is much lower at $170,000. Building up a larger nest egg than that could help you avoid struggling financially.
But having more money in savings doesn’t guarantee that your nest egg will last. If you want to make sure you have enough money to cover your expenses throughout retirement, however long it may be, then you’ll need to come up with a withdrawal rate that works for you.
Financial experts have long touted the 4% rule, which has you withdrawing 4% of your savings balance your first year of retirement and adjusting future withdrawals for inflation.
But you’ll need to make sure your investment mix aligns with the 4% rule if you're going to use it, which largely means having a fairly even stock/bond split in your portfolio. You should also know that the 4% rule assumes you want your money to last for 30 years. If you have a longer or shorter anticipated retirement, you should adjust your withdrawal rate accordingly.
In fact, your best bet may be to consult with a financial advisor on a target withdrawal rate. You can also adjust that rate with their help throughout retirement based on factors like market conditions and your personal needs and expenses.
Another rule states that you should expect to need 80% of your pre-retirement income during your retirement years, so plan to have enough saved and spend accordingly.
4. Lock in a higher Social Security benefit
The average monthly Social Security benefit for retired workers today is about $1,915. But delaying your Social Security sign-up beyond full retirement age could leave you with much more monthly income.
Full retirement age is when you get your complete monthly benefit based on your earnings history. If you were born in 1960 or later, that age is 67.
You can accrue delayed retirement credits until age 70 by waiting to sign up for Social Security, which are worth 8% per year. If you’re eligible for $1,915 a month at 67, filing for benefits at 70 raises those monthly payments to about $2,375.
5. Continue to work
T. Rowe Price finds that 57% of retirees wish to continue working in some capacity. If you’re willing to take a part-time job or sign up for some gig work in retirement, you’re less likely to run into difficulties paying your expenses.
Not only could working put extra cash in your pocket, but it could also be a way to keep busy in retirement without having to spend money. And you may find that your job serves as a nice social outlet to boot.
All told, there are plenty of steps you can take to avoid struggling financially in retirement. And if you’re not yet close to that milestone, talk to a financial advisor to make sure your savings are on track. A professional can also help you come up with a plan so you’re able to approach retirement finances with more confidence.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
