One of the top questions I hear and read about is some version of, “how long will my money last?” In most cases, people are concerned about running out of money in retirement.
With so many people retiring early these days, it's a legitimate concern. Money doesn't need to last longer because we're retiring at younger ages. That's only part of the story. We are also living longer than at any time in history.
According to the Centers for Disease Control (CDC), Americans' average life expectancy was born in 2017 in 78.6 years. Men's life expectancy in 2017 is 76.1. Women averaged a five-year longer life expectancy at 81.1 years.
Those aged 65 in 2017 are expected to live another 19.5 years (age 84 1/2). For men, it's age 83 and women age 86. I've seen other studies project that at least one spouse at age 65 has a 45% chance of living until age 92. That means our money and income have to last a lot longer than in years past.
Here's a chart from the CDC study I referenced.
How Long Will My Money Last – Life Expectancy
It's more important than ever to prepare for living a longer life. But how do you know what age to use? That's a great question. My suggestion is to plan to live until at least age 90. That may sound crazy. Here's my reasoning.
If you plan for a shorter life expectancy and set up spending based on that, how will you adjust if you live longer? What will you cut back?
One of the biggest mistakes retirees make occurs when we underestimate the cost of health care in retirement. Remember, the average health care expenses in retirement range from $250,000 – $350,000. I'm not talking about total costs here. These numbers represent pocket expenses retirees pay. We incur the vast majority of those expenses in our later years of life. If you planned not to be around that long and set up spending accordingly, Where will the money come from paying for health care and any other unexpected expenses?
On the other hand, if you plan for a longer life expectancy, set up spending accordingly by cutting back expenses and lowering the budget, you'll have a better chance of not running out of money.
To help you think about ways to make your money last longer, here are five things you can do today to get started.
1. Reduce Spending
Have a Budget
Another thing that may seem super obvious is to have a budget. However, in my experience, many of us don't.
For those who don't want that kind of detail, Mint.com is an excellent option. Whichever tool you choose, or if you build your own, tracking expenses in a budget is the best way to manage and cut back on unnecessary outflows of cash.
In his book Financial Freedom, Grant Sabatier has a chapter on budgeting. I reviewed that chapter in an earlier post. Grant's view is that most budgets focus too much on the little expenses. He contends that creates a scarcity mindset that makes it hard to stick with the budget. His method focuses on the three costs that make up almost two-thirds of our spending – housing, transportation, and food.
Whichever method works for you, make sure you get in the habit of operating on a budget. Forming this habit while you're preparing for retirement will go a long way to helping you achieve a successful retirement. You don't want retirement time to be when you start working from a budget.
I realize this is rudimentary advice for many of you. But I know too many people living without a budget and spending more than they earn. They figure they'll start the budget later, living it up in the meantime. The problem – “later” comes much sooner than we expect.
2. Reduce or Eliminate Debt
I know. I know. I'm stating the obvious. But seriously. Look at the numbers on the size of debt Americans carry.
It's safe to say that many people entering retirement carry debt with them. Get laser focuses on paying down or eliminating debt before you retire. It brings financial freedom like no other thing I know. There are two primary ways to pay down debt – the debt avalanche and the debt snowball.
The avalanche method promotes paying off the highest interest debt first to reduce the cost of the debt. The snowball method supports paying off the smallest balances first. The little victories, in theory, offer success that motivates you to keep going.
Whichever way you choose, get on track to get rid of high-interest debt.
3. Maximize Your Social Security Income
For most, Social Security is the only guaranteed retirement income option. This Social Security Bulletin estimates that 40% of baby boomers' retirement income will come from Social Security. Research sources indicate about half of all Americans file during their first year of eligibility, typically age 62. Starting at age 62 gives you reduced benefit but for a more extended period, assuming average life expectancy.
Waiting for full retirement (age 66 for most baby boomers) increases your Social Security income by 25%. If you can wait until age 70, your income grows by another 32%. Claiming early can be very costly in the long term. Take a look:
If married, divorced, or widowed, you have other options to increase your Social Security income. Make sure you thoroughly analyze your choices before making a decision. It is essential to get it right the first time. A 2010 rule change prohibits changing your Social Security election after twelve months.
Many people don't realize that Social Security income can be taxable. Know the rules to be sure and reduce the income tax on Social Security. We'll talk about that more in the next section.
4. Smart Withdrawals from Investment Accounts
Conventional wisdom says to take income from taxable accounts first, and then retirement accounts (IRAs, 401(k)s, etc.). However, that may not be the best option.
As much as 85% of Social Security income may be subject to tax. The income thresholds and tax consequences are as follows:
Fifty percent of social security for singles earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000 are subject to tax. Eighty-five percent of social security for singles making over $34,000 and couples earning over $44,000 are subject to tax.
Consider withdrawing from retirement accounts first. To minimize taxes, limit withdrawals to amounts that don't exceed the 15% marginal bracket. If this income means you can delay Social Security filing, your benefit will grow, ideally, until age 70 (see above example).
If you need additional income, consider selling stocks or stock mutual funds held longer than a year in taxable accounts. Under the current tax code, you pay these taxes at capital gains tax rates (15% or 20%).
This strategy reduces IRA account balances, ultimately decreasing your required minimum distributions (RMDs) from your IRAs. RMDs must begin in the year following the year you reach age 70 ½.
Converting those IRAs to Roth IRAs is another consideration. Though you pay taxes in the year of conversion, withdrawals from a Roth IRA are tax-free.
5. Get the Right Assets in the Right Accounts
The answer to the question we posed in the beginning, “how long will my money last in retirement” is not a simple one. It depends on many factors, some of which I've tried to cover in this post.
Proper personal financial management takes discipline. If you're married, it's much easier if both of you are on the same page. Couples need to talk about money and review their finances regularly. If both spouses are on the same page, achieving a successful retirement goal will be much more attainable.
Forming good habits during our working years makes it easier to continue those habits when we retire. I've stated multiple times in past posts that the three principles of personal finance – spend less than you make, save and invest the difference, and reduce or eliminate death, are simple but not easy. The earlier we start, the better off we will be.
Another thing I often repeat about planning is this – learn to be flexible. Life gets in the way of our plans sometimes. Be willing to change and adapt as circumstances change.