• Retirement and Annuity Advisor Jennifer Lang

How Not to Run Out of Money in Retirement

“What can we do to not run out of money in retirement?” and “Will we have enough money to last as long as we are retired?”

Those are the two big questions which nearly all retirees have. For most of us, though, they are top concerns that what we all worry about as we approach retirement. Then we think about quite often as we move through our retirement years.

Good news, however. To help alleviate the worrying and wondering, the solution is -- quite simply -- to have a PLAN.

Planning for How You Won’t Run Out of Money

If you haven’t already, you or a financial professional need to set up a 30-year Retirement Plan spreadsheet. This plan will include an integrated income, expense, and balance sheet.

Nobody has a crystal ball as to how long they will live. But you can at least make an educated guestimate by looking at your family history against current statistics, and then balancing that with your gut instinct.

Your best starting income-expense budget model for your plan is the one you are living now, adjusted year-to-year over 30 years, or whatever planning horizon you choose. Be sure to realistically account for taxes and inflation.

While you may be a DIY person when it comes to budgeting and doing your taxes, it’s an excellent idea to seek professional guidance.

Consider taking advantage of the expertise of a knowledgeable financial professional to help you“sanity check” your plan and all its assumptions. A financial professional can help with you that.

Matching Your Retirement Income Streams to Expense Types

Having budgeted our expenses for a long time, we all know that when it comes to expenses, they range somewhere between these two extremes:

  • (A) “I absolutely have to pay.”

  • (B) “I could easily drop this expense if need be.”

So, the typical retiree household expenses can be organized into four PRIORITY classifications:

  • Priority 1: non-optional expenses for basic survival, such as food, water, shelter, power, and so on

  • Priority 2: semi-optional “quality-of-lifestyle” expenses that could be reduced if necessary

  • Priority 3: 100% optional and discretionary expenses that could easily be reduced or eliminated

  • Priority 4: Random, out-of-the-blue events that may never happen to you, or some may

Some "Priority 4" type expenses can be relating to a major health event, fire or flood disasters, or unexpected support of a family member. That being said, keep this in mind. The following expenses, classified "1-4," may be different from what you would choose, customized to your life experiences and priorities. Starting the Process of Planning When matching up your retirement expenses to income streams, it doesn’t really make a dig difference if you start with your expenses first, or your income first. The process of making the two match up (break-even) is an iterative process. If there is gap between the two, you either have to fit your projected expenses to the retirement income you have. Or you will have to figure out how to increase your income to cover your projected expenses. That is Retirement Planning 101! PRIORITY 1: Expense-Income Matching These would be typical Priority 1 expenses: non-optional expenses for basic survival

  • Home: mortgage P&I, insurance, real estate tax

  • Household: cash, groceries

  • Utilities: garbage, power, water, sanitary, cell phone

  • Medical: out-of-pocket doctor, dentist, eyecare, drugs, Medicare premiums

  • Income Taxes: federal, state, city

Since these are “must-pay” expenses, they need to be covered by retirement income streams that are essentially fixed, monthly recurring for a lifetime, and guaranteed:

  • Social Security: monthly payments for you and/or your spouse

  • Pension: pension payouts for you and/or your spouse

If there is a surplus of income covering Priority 1 expenses, some or all of this surplus can be used to first close any gap in Priority 2 expense funding. Then secondly any gap in Priority 3 expense funding. Covering Income Gaps in Living Expenses If you are projecting an income shortfall in your plan, one strategy would be to create an annuity. Let's consider a hypothetical. As an example, assume you project that your Priority 1 Income during your first 10 years of retirement is short $300 per month. Say you retired at age 60, and you had a monthly income gap of $300 you needed to cover. And you needed to cover this monthly income gap for 10 years. Consider this a ballpark number for purposes of demonstration. But for preliminary planning, you would need about $31,850 to fund a fixed 10-year immediate annuity to cover your monthly income gap of $300. Keep in mind that this initial premium will vary among insurance carriers. To fund this, you could use money from your IRA, from your qualified employer retirement plan, from after-tax savings, or from liquidated dollars from the sale of an asset. Finding the Right Annuity Strategy for You Apart from covering an income gap between your monthly living expenses and your guaranteed income with an annuity, another solution is to create an “income floor” with a guaranteed annuity income stream. If having a certain floor of income sounds worthwhile to explore to you, ask your financial professional to explain this concept. And another note: There are many types of annuities. They can be fairly involved in their execution, some annuity contracts require some consumer assumptions, and you should be careful who you choose in the financial services market for guidance. Not all financial professionals offer the same value in terms of reputation and, more importantly, financial soundness. Annuities of the fixed variety are a core expertise of the financial professionals at JenniferLangFinancialServices.com PRIORITY 2: Expense-Income Matching These would be typical Priority 2 expenses: semi-optional “quality-of-lifestyle” expenses.

  • Home: landscape, pest control, maintenance

  • Household: cleaners, postage, subscriptions

  • Utilities: land line, internet, TV