People fear running out of money more than they do death.1 Although we don’t know when we will die, we know we will not live forever (unless someone discovers that elusive fountain of youth). Running out of money means the time one has left will be spent in poverty, which is why it is so scary. What factors increase the odds you will outlive your money, and what can you do to ensure retirement success?
The first factor that would cause a person or couple to run out of money is how much is spent compared to income. If you are consistently living on more than what comes in, that is a recipe for disaster. I’ve seen cases where people have millions but will likely run out of money in as little as 13 years because they spend too much.
Conversely, I’ve seen people with far less that will have millions by age 95 because they don’t need to use their assets. They have a good pension and Social Security that covers their expenses. Be wise with your money, and find the right balance to do the things you want with the time you have left on this planet without taking out so much that it blows up your nest egg.
The second factor over which you have no control is the luck of when you retire. We call this sequence-of-return risk. Most people would guess the worst years to retire were: 1929 (Great Depression), 1987 (stock market crash), 2000 (tech bubble), and 2007 (Great Recession). Research done recently would say those years didn’t cause people to run out of money if they had a balanced portfolio with stocks and bonds. During these bad stock market times, bonds held up and allowed time for stocks to recover.
The worst year to retire was actually 1965, “Because, beginning in that year, both the stock and bond market embarked on a sustained period of negative inflation-adjusted returns.” In other words, bonds and stocks didn’t grow as much as inflation.2
We are facing a similar storm as inflation has reared its ugly head and may impact us for years to come. Inflation causes prices to go up and can eat away at savings, especially money sitting idly in the bank.
So, what can be done to protect your nest egg and help assure you don’t outlive your money?
First, make sure you’re financially balanced. Take out enough money to be able to do the things that matter most without overspending.
Second, find a way to protect your assets against the sequence-of-return risk. For our clients, we use a Lifetime Income Plan, which segments investments into different time frames based on when the money will be used. Money to be used in the next 1-5 years needs to be conservative, 6-10 years can be moderate, and 10+ years can be aggressive. This helps protect your portfolio against downturns while still allowing it to grow to keep up with inflation.
At SFS, we are lucky to have James Derrick, our Chief Investment Strategist, who can adjust investment portfolios during the changing market conditions.
Don’t leave your golden years to chance. Make sure you have a plan that will help your money last your lifetime, regardless of any market cycle you may face.
Listen to a deep dive about outliving your money on the Power Up Wealth podcast.
(1) https://www.allianzlife.com/-/media/files/allianz/documents/ent_991_n.pdf
(2) https://www.barrons.com/articles/retirement-planning-life-expectancy-51643473065?siteid=yhoof2
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