6 Steps to Avoid Outliving Your Money in Retirement
Guest Contributor, Kostas Chiotis
Don’t Outlive Your Retirement Money!
Planning for retirement is one of the most important things you can do financially. It’s also one of those things that people tend to put off until retirement is right around the corner. But if you don’t have a solid plan in place, you risk outliving the money you set aside for retirement. Although, if you start today, it’s possible to avoid outliving your money. Make it a priority and your future self will thank you.
So whether you are already retired, nearing retirement, or still have decades to go, this article will give you some meaningful strategies for making sure that you won’t go broke in your golden years.
Avoid outliving your money in retirement with these 6 steps.
1. Start Planning for Retirement Today
Whether you are age 18 or 58, it’s time to start planning for retirement. The younger you start, the more time you have to save, which means you don’t have to put as much away each month.
But even if you get a late start, there are ways to catch up and secure a comfortable retirement. The important thing is that you make a concrete plan. And that starts with figuring out how much you will need. Once you know how much you’ll need in your retirement nest egg, you’ll want to plan how to achieve that goal. If you are starting early, you have more flexibility. If you start later, your options are more limited and you’ll need to be more careful with your planning.
2. Figure out How Much You Need
When saving for retirement, you are literally saving money to cover all of your costs for every year of retirement. But you can’t just operate with the logic of “save as much as possible.”
You want to figure out exactly how much you will spend each year and, as morbid as it sounds, how many years you will live in retirement. If you end up saving more than that target number, great. But don’t just save blindly for retirement.
Here are some tips for making a solid retirement plan that you will not outlive:
Figure out the number of years you need to save for. That means figure out the age at which you want to retire and then estimate how long you expect to live. It’s a little dark to think about but for planning purposes, you want to be as optimistic as possible. It’s better to have more money than you actually need than not enough. So if you’re struggling to come up with an “end date”, find out the average lifespan in your family and add at least 5 years for safety.
Figure out how much you will spend each year. There are a few ways to do this. But the best way is to make a sample monthly budget of what you’ll spend while retired and then multiply that by 12 and add in any annual expenses you’ll have. Remember to include any travelling or hobbies you enjoy.
OnTrajectory is my favorite retirement calculator. You might want to give it a try.
Remember to be as thorough as possible. Account for increased medical costs. You might consult an expert or even talk to parents, grandparents, or anybody else you know who is retired. Plan now to avoid outliving your money in the future.
3. Get Your Debt Under Control
Going into retirement with debt can be a major setback. In an ideal scenario, by the time you hit retirement, you will be completely debt free. That means that your mortgage is paid. You won’t have car payments, student debt, credit card debt, or any other financial obligations.
If you still have debt, prioritize paying it off, first. Paying off all your debts as soon as possible is the best way to save money because as you pay off your debt you eliminate the interest payments. This can potentially save you thousands of dollars, especially if you pay off big ticket items like your mortgage early.
That’s thousands of dollars that can be better spent investing in an enjoyable and stress-free retirement!
4. Consider Part-time Work
If retirement is looming on the horizon or you are already in retirement, you have fewer options for saving and investing. But it’s still not hopeless. Consider taking on some flexible, freelance work that will allow you to travel and fulfill your retirement dreams.
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5. Invest, Invest, Invest
Investments are the foundation of a solid retirement plan. Allocate your money into the highest yield, lowest risk investments you can get. You might want to work with an advisor to create a customized investment plan. But basically, you want to invesetigate the following investments:
- Real estate or REITs
- Combined DIY and automated investment platforms like M1 Finance
- Low-risk stocks
- Low fee annuities
- Exchange Traded Funds
- Mutual Funds
- Automated investment advisors (robo-advisors)
The key things you are trying to do are to minimize the risk of losing money while maximizing the amount you earn on your investments. For a retirement plan, you want to opt for the more secure investments. High-risk investments might potentially offer a higher return but you don’t want to put your financial security at risk for a higher return. Look for modest but steady returns.
6. Consider Passive Income Opportunities
This is one of the reasons investing is important. Smart investments help you save more for retirement. But more importantly, they can be a fantastic source of passive income. Passive income is any income that you don’t have to work daily to earn. Instead, it’s interest or income earned on smart investments you’ve previously made. Here are a few passive income examples:
- Rent paid to you from properties you own.
- Dividends earned on stocks
- Owning a business or a share of a business (but not actively participating in running it)
While these things are called “passive income” that doesn’t mean you can sit back and let the money roll in. You need to keep tabs on your income sources and invest some time in managing them. This isn’t a full-time job but it’s also not something you can ignore.
You can hire a professional to manage your assets for you but you still want to keep tabs on that person and actively participate in any planning or major decisions.
The Outlasting Your Money in Retirement Takeaway
What retirement planning really comes down to is finding strategic ways to make your money grow faster than you spend it. That means you want to be debt free so that the only shrinkage is from the money you are spending to enjoy your retirement. Outliving your retirement money is something we all worry about. By taking these steps, you can make sure that your money outlasts than you!