Making Your Money Last in Retirement

How do you make your money last in retirement? This is by far, the biggest question our female pre-retirees have about retirement. Women in particular face additional challenges when it comes to retirement planning because they tend to live longer than men, need more care at the end of their lives, they may have earned less compared to their male counterparts, and have often spent some time out of the workforce for caregiving. If these challenges resonate, our retirement planning approach is specifically designed with these realities in mind.

But let’s face it, even without those hurdles, staring down 20-30 years of life without a paycheck can be anxiety provoking. To make your money last in retirement you need to have enough savings and your spending must be sustainable. This, of course, begs the question:

How do you make you money last?

To create a successful plan that will make your money last in retirement, you need to focus on three facets of retirement:

Human side
Financial side
And build in Flexibility!

In our Retirement: Not One Size Fits All article, we unpacked the critical mission of designing your retirement to fit your style. We’re calling this the “human side” of retirement. Some time spent planning ahead will allow you to customize a retirement to fit you like your favorite shirt – one you look forward to wearing and showing off at every occasion. Check it out so you can work towards a happier retirement.

Today we are focusing on the financial side of the equation and how to make your nest egg last as long as you do. Let’s start by organizing some information.

Your projected income + your assets – your spending plan =

your financial plan

Your projected income

Your projected income consists of predictable income and less predictable income. The typical stable sources of income are:

Pensions: If you are lucky enough to have one, and 59% of current retirees do.

Social Security: There’s a lot of fear among pre-retirees that Social Security won’t be there for them. Yes, you can rely on this if you are closer to retirement; Read here if you want to know the suggested fixes to the system.

Annuity payouts: If you have annuitized your annuities (this is different from “living benefit riders” and “withdrawal benefits” as it is fixed and taxed differently).

Speak to your financial advisor before making any changes to your annuities.

Confirm if any of these income streams have inflation or cost of living adjustments (COLA) to factor in. It might seem trivial, but annual adjustments to your pension income for inflation can have a huge impact over a 20 or 30 year retirement.

Maintaining your purchasing power is one of the biggest risks of retirement!

Social Security and government pensions receive COLAs which mean they adjust with inflation over time. Here are the COLAs for Social Security since 1975.

Many pensions from private companies do not have cost of living adjustments; an annual flat amount will lose its buying power over time. Inflation is one of the biggest risks to a three-decade retirement. Check out what typical items cost the year your were born. Now compare it to your most recent trip to the store.

Comparing the cost of eggs, gas, and bread over 20 years is dramatic. Remember, your plans needs to make sure your money lasts in retirement.

Source: U.S. Bureau of Labor Statistics https://www.bls.gov/charts/consumer-price-index/consumer-price-index-average-price-data.htm

Your retirement assets

Take inventory of your assets: liquid assets, investable assets, rental property, and illiquid assets (maybe ones you could liquidate if needed). Your liquid and investable assets – is the one that will supplement your projected, predictable income. Figuring out how to structure and draw down those assets efficiently is what our wealth management strategies are built around.

For example, let’s assume you want $7k/month during retirement for expenses net of estimated taxes. Here is an overly simplistic view:

$7k/month * 12 = $84,000/year in today’s dollars

Earmark 30% for taxes so gross up for your actual annual need = $120,000/year

LESS projected, predictable income

Social Security = 2023 average for 65 year old is $2,559/mo * 12 = $30,708/yr
No pension or annuity for this retiree as pensions are not predicted to be as common as they were for previous generations

This identified gap is what your portfolio will need to supplement annually and equals approximately $90,000/year in today’s dollars.

Using the often cited 4% rule, if you have approximately $2.3+ million in today’s dollars in investable assets then this could create a feasible scenario depending on the assumptions involved.

Clearly, we are generalizing the circumstances to illustrate a point and this is obviously based on many, many assumptions including but not limited to a moderate portfolio allocation. For example, do you want to include long-term care costs? Higher medical expenses? Is your spending somewhat flexible? Could you implement a guardrails strategy in years where the stock market is negative?

Always contact your financial advisory team (like our retirement planning team) to ensure the assumptions are customized to your specific situation.

Now let’s pick this apart using just one assumption – TAXES!

If $84k is net of taxes, how much should you gross up? We used 30% who can say what taxes will be after 2026 and beyond…
What is your marginal bracket at that point in time?
Do you have any tax advantaged accounts for sources of income? e.g. Roth IRA dollars?
Are you subject to other types of taxes and rates?
Does your state and/or city levy income taxes?
How much of your Social Security is taxed*?

This simplistic illustration shows you how we back into your withdrawal needs from your portfolio, customize variables and assumptions for your situations, and then track over time.

The primary goal is simple…

Make your money last in retirement

How to take action:

Your retirement spending plan

Track your current expenses to start identifying what you will increase, decrease, or keep the same during retirement. Use this list for starters. Here is the catch: some expenses are non recurring. This means inconsistent amounts – gifts, insurance premiums, home maintenance, travel, etc. – need to be tracked individually. The last thing you want is a surprise in spending when you think you are all set.

At Spark, the financial planning tool we use with clients has a spending review tool built in to help clients automatically capture and review their spending data. It saves clients time and helps make their financial plan more accurate.

And in case you are wondering, your spending will change through retirement. Healthcare expenditures will increase, but the total cost will fall over time according to research.

A better plan means more confidence, security, and peace of mind.

Recognize that retirement has different chapters too – just like the stages or seasons of your middle adulthood. Some call this the “go go, slow go, and no go” phases, though that has been replaced with “early”, “middle”, and “late”. which is a much more preferred way of thinking about your future. Here are suggestions for budgetary seasons too.

NOW…Stress Test Your Financial Plan to make your money last in retirement.

If you have completed financial planning before, you know that once you create your current scenario, you should be tinkering with other possible (or desired) scenarios and you should always be stress testing them. For all those non-statisticians out there, this is called probability analysis or Monte Carlo simulation.

Since we cannot predict the future, this approach uses data for what could possibly happen.

While you have some control over your spending, you don’t have control over how the stock market performs. So how do fee-only financial advisors manage that risk? Since we never know what the market returns will be in any given year, at Spark Financial Advisors we run 1,000 trials to illustrate potential paths in our retirement plans. We target the result you are comfortable with depending on your risk tolerance and timeline.

For example, if you have decades until retirement, you might be more comfortable with a probability result of 70-80% yet if retirement is just around the corner, you (and me as your financial advisor) would sleep better knowing the result is closer to 84-90%. It comes down to knowing what the variables are, the analysis’s sensitivity to those variables, and what you have control over.

Retirement analysis is most sensitive to:

ongoing retirement savings
retirement age
retirement spending
portfolio allocation
portfolio rate of return
portfolio’s risk profile
Inflation
longevity expectations

The bolded ones are the ones you actually have control over, or at least more influence.

The #1 goal is to not run out of money.

Lean on a CFP® to help guide you to and through this milestone. This isn’t an exercise you can do once and then forget. You need to have a partner to continually help you make adjustments to the plan as life throws you curveballs and/or your goals change.

That shirt you designed for yourself at 60 may not stay in style throughout your retirement. That’s okay and, frankly, expected. As your financial planning partner will continue to adjust the levers, adapt the path, and listen to what is truly important to you so we can make your long-term plan sustainable and inviting.