How Not to Run Out of Money in Retirement

“What can we do to not run out of money in retirement?” and “Will we have enough money to last as long as we are retired?”

Those are the two big questions which nearly all retirees have. For most of us, though, they are top concerns that what we all worry about as we approach retirement. Then we think about them quite often as we move through our retirement years.

Good news, however. To help alleviate the worrying and wondering, the solution is — quite simply — to have a PLAN.

Planning for How You Won’t Run Out of Money

If you haven’t already, you or your financial professional need to set up a 30-year Retirement Plan spreadsheet. This plan will include an integrated income, expense, and balance sheet.

Nobody has a crystal ball as to how long they will live. But you can at least make an educated guestimate by looking at your family history against current statistics, and then balancing that with your gut instinct.

Your best starting income-expense budget model for your plan is the one you are living now, adjusted year-to-year over 30 years, or whatever planning horizon you choose. Be sure to realistically account for taxes and inflation.

While you may be a DIY person when it comes to budgeting and doing your taxes, it’s an excellent idea to seek professional guidance.

Consider taking advantage of the expertise of a knowledgeable financial professional to help you “sanity check” your plan and all its assumptions.

Financial professionals at SafeMoney.com can help with you that. Also, as you maintain your plan, take advantage of SafeMoney’s many articles that go into other retirement issues in detail.

But the scope of this article is to give you a strategy for prioritizing your expenses, and matching your retirement income streams to pay for those expenses.

Matching Your Retirement Income Streams to Expense Types

Having budgeted our expenses for a long time, we all know that when it comes to expenses, they range somewhere between these two extremes:

• (A) “I absolutely have to pay.”
• (B) “I could easily drop this expense if need be.”

So, the typical retiree household expenses can be organized into four PRIORITY classifications:

• Priority 1: non-optional expenses for basic survival, such as food, water, shelter, power, and so on
• Priority 2: semi-optional “quality-of-lifestyle” expenses that could be reduced if necessary
• Priority 3: 100% optional and discretionary expenses that could easily be reduced or eliminated
• Priority 4: Random, out-of-the-blue events that may never happen to you, or some may

Some “Priority 4” type expenses can be relating to a major health event, fire or flood disasters, or unexpected support of a family member.

That being said, keep this in mind. The following expenses, classified “1-4,” may be different from what you would choose, customized to your life experiences and priorities.

Starting the Process of Planning

When matching up your retirement expenses to income streams, it doesn’t really make a big difference if you start with your expenses first, or your income first.

The process of making the two match up (break-even) is an iterative process.

If there is gap between the two, you either have to fit your projected expenses to the retirement income you have. Or you will have to figure out how to increase your income to cover your projected expenses.

That is Retirement Planning 101!

PRIORITY 1: Expense-Income Matching

These would be typical Priority 1 expenses: non-optional expenses for basic survival

• Home: mortgage P&I, insurance, real estate tax
• Household: cash, groceries
• Utilities: garbage, power, water, sanitary, cell phone
• Medical: out-of-pocket doctor, dentist, eyecare, drugs, Medicare premiums
• Income Taxes: federal, state, city

Since these are “must-pay” expenses, they need to be covered by retirement income streams that are essentially fixed, monthly recurring for a lifetime, and guaranteed:

• Social Security: monthly payments for you and/or your spouse
• Pension: pension payouts for you and/or your spouse

If there is a surplus of income covering Priority 1 expenses, some or all of this surplus can be used to first close any gap in Priority 2 expense funding. Then secondly any gap in Priority 3 expense funding.

Covering Income Gaps in Living Expenses

If you are projecting an income shortfall in your plan, one strategy would be to create an annuity. Let’s consider a hypothetical.

As an example, assume you project that your Priority 1 Income during your first 10 years of retirement is short $300 per month.

Say you retired at age 60, and you had a monthly income gap of $300 you needed to cover. And you needed to cover this monthly income gap for 10 years.

Consider this a ballpark number for purposes of demonstration. But for preliminary planning, you would need about $31,850 to fund a fixed 10-year immediate annuity to cover your monthly income gap of $300. Keep in mind that this initial premium will vary among insurance carriers.

To fund this, you could use money from your IRA, from your qualified employer retirement plan, from after-tax savings, or from liquidated dollars from the sale of an asset.

Finding the Right Annuity Strategy for You

Apart from covering an income gap between your monthly living expenses and your guaranteed income with an annuity, another solution is to create an “income floor” with a guaranteed annuity income stream.

If having a certain floor of income sounds worthwhile to explore to you, ask your financial professional to explain this concept.

And another note: There are many types of annuities.

They can be fairly involved in their execution, some annuity contracts require some consumer assumptions, and you should be careful who you choose in the financial services market for guidance.

Not all financial professionals offer the same value in terms of reputation and, more importantly, financial soundness. 

Annuities of the fixed variety are a core expertise of the financial professionals at SafeMoney.com.

So, don’t hesitate to call us to help you with the many annuity options. We will also help you find an independent financial professional.

PRIORITY 2: Expense-Income Matching

These would be typical Priority 2 expenses: semi-optional “quality-of-lifestyle” expenses.

• Home: landscape, pest control, maintenance
• Household: cleaners, postage, subscriptions
• Utilities: land line, internet, TV
• Medical: supplemental insurance (to Medicare B)
• Automobiles: Insurance, gas, repairs, parking, tolls, license
• Personal: clothes, gifts, haircuts
• Contributions: churches

Since these are semi-optional “quality-of-lifestyle” expenses, they can be covered by funds from retirement accounts. Your plan should take note, though, that their value will likely fluctuate with the ups-and-downs of the equity markets:

• 401(k)s
• 457s
• 403(b)s
• IRAs
• Roth accounts

If there is a surplus of income covering Priority 2 expenses, some or all of this surplus can be used to close any gap in Priority 1 expense funding first.

Thereafter, it can be used for Priority 3 expense funding second.

PRIORITY 3: Expense-Income Matching

These would be typical Priority 3 expenses: 100% optional, discretionary expenses that can be reduced or dropped as necessary

• Entertainment: clubs, cabins, movies, tickets, restaurants, sports & fitness
• Household: liquor
• Medical: long-term care insurance
• Travel: airfare, hotel, car rental
• Automobiles: wash, ride sharing
• Contributions: schools, nonprofits, service organizations, causes, research
• Business Expenses: advertising, web site, software, supplies, postage

Since these are 100% optional, discretionary expenses, they might be covered by certain variable and contingent sources of income:

• Employment income
• Sale/liquidation of assets
  • Primary house
  • Second home (vacation home) or cabin, condo, or timeshare
  • Appliances, furniture, art, computers, electronics
  • Automobile(s)
  • Boat(s)
  • Hardware, tools, lawncare equipment
  • Personal property and jewelry
• Inheritance(s)

PRIORITY 4: Expense-Income Matching

These would be typical Priority 4 expenses: Random, out-of-the-blue events that may never happen to you, or some may.

These can include major home repair and upgrades; major health needs, major dental, and major prescription expenses; disability-related expenses; fire or flood disaster costs; or the costs of a family emergency.

These events tend to be costly in nature, so they are typically insured against with:

• Life insurance
• Auto insurance (typically included as a Priority 2 expense)
• Home insurance (typically included as a Priority 1 expense)
• Flood insurance (typically included as a Priority 1 expense, if required)
• Long-term disability insurance (typically only needed during one’s working years)
• Long-term care insurance

What insurance coverages to carry, and how much, can be complicated personal questions to answer. They are a perfect topic to discuss with your financial professional. 

This will likely take some consideration to figure out what is right for you and your spouse, and how much insurance you can afford.

Other Planning Steps to Not Run Out of Money in Retirement

We’ll leave you with one last question: How much of an estate do you want to pass on to your heirs?

You might think of this as a “PRIORITY 5 Remainder.” But it could be viewed as an “expense” if you are proactively reserving funds for this purpose. 

There is no right or wrong answer to this question because it is a choice that is private to you. Whatever your goal is, from “nothing” to “a lot,” it can make a huge impact on your income-expense planning in your 30-year plan. 

Just keep in mind these perspectives:

• The only rule is your rule
• You deserve to be happy and healthy in your retirement
• If you determine with a financial professional’s help that need be, work longer and save more to the extent you can to reach your retirement goals

Need Help Planning for Your Money Game-Plan in Retirement?

The most important thing? That you start planning, and the best time is today.

In survey after survey, retired and working-age Americans who planned ahead for their retirement finances reported many positive outcomes.

When they create a plan with the help of a financial professional, people tend to say they have higher retirement savings, a higher sense of personal financial wellness, and more financial peace of mind about their retirement futures.

Are you ready to start planning for your financial security? Financial professionals can help you ensure you don’t run out of money in retirement and avoid other potential mishaps.

Use our “Find a Financial Professional” section to connect with someone directly. You can request a no-obligation first appointment. Should you need a personal referral, call us at 877.476.9723.