Many retirees worry about running out of money in retirement. After spending decades saving and investing for their golden years, the prospect of exhausting those funds and not having enough income to cover expenses is frightening. So do retirees actually run out of money? The data shows that some do, while many are able to successfully manage their finances in retirement.
What percentage of retirees run out of money?
According to a 2018 study by the Employee Benefit Research Institute (EBRI), approximately 29% of retirees run out of money in retirement. The study found that of the 29%, about 17% run short of money within the first 10 years of retirement, 8% within 11-20 years of retirement, and 4% after 20 years of retirement.
Some key factors that contribute to retirees running out of money include:
– Retiring too early before age 65 when government benefits like Social Security and Medicare kick in
– Inadequate retirement savings and assets
– Heavy reliance on Social Security income in retirement
– Extended unemployment during retirement years
– Unanticipated healthcare costs in late retirement
– Supporting other family members like grown children or elderly parents
– Poor financial planning and budgeting in retirement years
So while the majority of retirees are able to avoid running out of funds, a significant minority do deplete their retirement savings due to those reasons above.
How much money do retirees need?
Financial advisors estimate that retirees need approximately 80% of their pre-retirement income to maintain their standard of living in retirement. However, that amount can vary substantially based on these factors:
– Debt load – Retirees who enter retirement debt-free or with very low debt have lower fixed expenses and need less income.
– Housing – Owning a home outright is ideal in retirement. Rent, mortgages, and home equity loans can significantly increase housing costs.
– Healthcare – While Medicare covers a large portion of healthcare, there are still premiums, co-pays, dental, hearing and vision costs to account for.
– Lifestyle – Discretionary spending like travel, dining out, memberships, etc. impact budgets greatly. More modest lifestyles need less income.
– Inflation – As living costs rise, income needs increase in retirement to keep pace. Conservative estimates for inflation are around 3% annually.
– Life expectancy – Retirees who live into their late 80s, 90s or beyond need to ensure they have income that lasts their full lifetimes.
As a general guideline, most financial planners recommend retirees have between $500,000 and $1 million in retirement savings at a minimum when entering retirement. However, the actual amount to sustain an individual through retirement can vary significantly based on those factors above.
How is retirement income generated?
There are several common sources retirees rely on to generate retirement income:
– Social Security – The average monthly Social Security benefit in 2022 is $1,681. While Social Security replaces about 40% of pre-retirement income on average, relying solely on Social Security would be very difficult.
– 401(k)s and IRAs – These retirement accounts like 401(k)s, 403(b)s, and IRAs allow decades of tax-deferred growth. Withdrawals are taxed as income when taken in retirement.
– Pensions – Defined benefit pension plans pay guaranteed monthly amounts to retirees. However, pensions are becoming less common with more companies switching to 401(k) style plans.
– Annuities – These insurance contracts can provide guaranteed lifetime income in retirement for a lump sum premium. However, payout rates are low right now.
– Work earnings – Some retirees generate income by working part-time in retirement at jobs they enjoy. However, employers often limit hours to avoid providing benefits.
– Investments – Interest, dividends, rental income, etc. from investments and real estate provide cash flow. But returns are not guaranteed year-to-year.
Creating multiple income streams from those diverse sources helps protect retirees against the risk of any single income source drying up or losing purchasing power to inflation over time.
How can running out of money in retirement be avoided?
There are several important steps retirees can take to help their savings and income last their full retirement:
Reduce fixed costs – Downsize to a smaller, less expensive home or relocate to a lower cost of living area. Pay off debts, including mortgages. Minimize insurance costs where possible.
Be realistic on spending – Track spending to get a clear picture of needs vs. wants. Develop a retirement budget that supports your lifestyle but isn’t excessive.
Delay retirement – Every year you delay allows more time to save and for Social Security benefits to increase. Even delaying from 65 to 70 makes a big impact.
Have adequate savings – Shoot for at least that $500k to $1 million savings target recommended by most financial planners before retiring.
Generate guaranteed income – Explore annuities or other income products that can cover essential baseline living expenses in retirement.
Maintain your health – Good physical health leads to lower healthcare costs in retirement. Don’t skimp on health insurance either.
Keep earning – Work at something enjoyable part-time to supplement retirement income if needed and able.
Invest conservatively – Be cautious on expected returns from investments. Have proper asset allocation and diversity.
Build in inflation – Use a 3-4% annual inflation adjustment factor when projecting future living costs in retirement.
Get professional advice – Consult fee-only financial advisors to review your full financial picture and retirement plan.
With proper preparation and planning, retirees can help ensure their savings provides enough sustainable income that lasts their lifetimes.
Conclusion
While the majority of retirees are able to successfully manage their finances and avoid running out of money, studies indicate approximately 29% do deplete their retirement savings entirely. This is often due to retiring too early, inadequate savings, overspending, unanticipated healthcare costs, or a lack of guaranteed income sources. With average life expectancies increasing, retirees need their savings to last longer than ever. Proper planning around expenses, healthcare, delayed retirement, guaranteed income sources, and conservatively investing and spending savings are key to generating enough retirement income that does not run out during your golden years. Consulting qualified financial professionals can also provide guidance to help retirees project income and spending needs and develop strategies to avoid running short on money later in retirement. With prudent planning, retirees can financially prepare for their long term needs and enjoy their retirement years without the stress of running out of funds.