3 Reasons You’re at Risk of Running Out of Money in Retirement – and What to Do About Them

Saving for retirement is not easy. Building a healthy balance in your IRA or 401(k) may require making sacrifices, such as working a demanding job or giving up certain luxuries, such as nice vacations. But if you can start your retirement with a sizable IRA or 401(k) plan balance, you can enjoy not only peace of mind, but also a more comfortable lifestyle.

Even if you save a lot for retirement, there’s no guarantee you won’t run out of money. This scares many people, and understandably so. Here are three factors that can cause your IRA or 401(k) to deplete — and what to do about each.

Americans are living longer these days. That’s a good thing in theory, but it can be tricky to save a nest egg.

One way to solve this challenge is to be strategic about your withdrawal rate. You may not want to follow the classic 4% rule, especially if your portfolio is more conservatively invested. A lower withdrawal rate such as 3% may be more appropriate depending on the composition of your portfolio.

Another way to reduce longevity risk is to secure more guaranteed income outside of your portfolio. One option is to delay applying for Social Security until you reach full retirement age. For every year you wait longer until age 70, your monthly benefits increase by 8%. And the more money Social Security pays you each month, the less money you should withdraw from your savings.

Stock market downturns, especially early retirement, can put you at risk of eventually running out of savings. If you are forced to sell your investments at a loss, you may end up depleting your funds, especially if this happens repeatedly.

The solution? Always have a large cash reserve as a retiree. A good rule of thumb is to have two years of living expenses in cash. This gives you time to ride out a stock market downturn.

Another important thing is to diversify your portfolio. Don’t get into growth stocks as a retiree, as they can lose most of their value during a market downturn. Throw some dividend stocks into the mix. They can be more stable, and dividend income can help offset other losses in your portfolio.

Health care costs tend to eat up a lot of retirees’ budgets. They also tend to increase over time and at a faster rate than inflation in general. Expensive health care bills can erode your savings and put you at risk of running out, so it’s important to have a plan.

One important thing to do is to choose your Medicare coverage wisely and review your plan choices in early fall each year. Another thing you may want to do is save separately for health care expenses in a health savings account. If you have a fund set aside to pay medical bills, you may not need to use your retirement plan every time you have to pay for health care.

Also, if you decide to go with Original Medicare instead of Medicare Advantage, look into supplemental coverage (Medigap) early. Doing so could secure cheaper premiums. If you have Medigap, it can help cover deductibles, coinsurance, and other big costs that can eat away at your wallet over time.

It is natural that a retiree will run out of money. But if you address each of these factors strategically, you can alleviate this concern and give yourself one thing to worry about.

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3 Reasons You’re at Risk of Running Out of Money in Retirement—And What to Do About Them Originally Posted by The Motley Fool