Why You’ll Run out of Money in Retirement

How much have you really thought about retirement? That question is the proverbial double-edged sword of a response in that most think about retirement quite a bit, worry about it in fact, while others are of the assumption that retiring securely financially is nearly impossible, so they don’t concern themselves with it, even as they get older.

Granted, retiring is a risk, a calculated adventure, that if you're not making certain money moves before and during retirement, you're likely to run out of money sooner than you think. 

Running out of money is a real problem, and about 50 percent of the American population believes they’ll run out of money during retirement.^[1]

The thought of retiring, calling it quits and presumably walking away from a lucrative job that has allowed you to prosper financially isn’t an easy decision, especially since you’re forgoing said paycheck and having to fall back on what you’ve been able to save.

Based on that 50 percent concern that money will run dry during your retirement, you’d believe that most feel as though they’re not able to save or not doing a very good job of saving for retirement in the first place.

The proof of that comes from the set of individuals who don’t really concern themselves with retirement, not that they aren’t worried about it but most likely feel as though it’s an uphill battle that they’ll never be able to overcome.

About 1 in 3 individuals have zero dollars saved for retirement, a staggering figure that can’t be ignored, even if you factor in those in their 20s and 30s who haven’t yet made retirement a higher priority endeavor.^[2]

The retirement dilemma isn’t just sparked by a lack of saving money, too, but have some legitimate concerns as part of more specific reasons retirement can be a scary proposition.

You have to consider health care, housing, debt and other factors that make retirement or the decision to do so more than just a whim of a thought, but instead a more extensive, question-and-answer process.

Of those individuals who are concerned about retirement, most site those health care costs, roughly 71 percent, as a man concern, followed by instability of Social Security (62 percent) and tax rates (52 percent).^[3]

The big question that encapsulates this entire discussion really is trying to figure out how much you’ll need to retire, a lump sum or an idea of what it will take to safely call it quits from work, and enjoy your Golden Years.

Some use the one million dollar plateau as a benchmark for what it will take to retire.

The better way to dissect what you’ll need to retire is to take a look at your yearly salary and make a determination from that figure.

The general rule of thumb is that by the time you retire, you’ll need approximately six ties your year salary saved.^[4]

That means a $50,000 yearly salary means you'll need to have about $300,000 saved. When you consider that same study said that the average person between the ages of 55 and 64 has only $110,000, you definitely see some room for improvement.

The real key to retirement and doing so in a way that makes sense for you centers on a few key points: what you’re making now, taking into account your current lifestyle, but also what you’re doing in your 30s and 40s to really save, versus putting it off until the last minute.

Also, what sort of budgeting is being done to retire and are you really trying to tackle debt while you’re still working? If not, you’ll be running short on funds, and run out of money if you’re continually doing these opposites of what would be considered sound, retirement centered moves:

You can’t stop borrowing money, amassing debt

Debt is probably one of the more underestimated aspects that retirees tackle in preparation and during retirement.

Generally speaking, debt is a major issue for all ages, but is more troubling as you start to see retirement ahead of you.

Between the ages of 55 and 64, that demographic still is sporting six figures in debt, roughly $108,000, in addition to the 65 to 74 age group that is still just under $70,000 in debt.^[5]

You’d like to tackle debt ahead of retirement, thus ensuring you have one less piece of expense to worry about as you stop working.

Consider an individual with $100,000 debt headed for retirement, but also the fact that if you’re someone who has become accustomed to borrowing money, using credit cards or purchasing with money that isn’t yours, what leads you to believe that is going to change?

The real troublesome piece of debt is not only the amount that you’ve amassed during your earlier years, but that you may still have a tendency to continue to buy and borrow moving forward, when the money isn’t as easily and readily available from your paycheck every month.

Studies report that retirement spending actually has a tendency to go up after you retire, not a good sign that you’ll last all the way through this process.

Generally, you’ll need about 80 percent of your income each year to live, retirement wise, like you did when you weren’t retired, but that figure gets lost on the masses with 46 percent of households spending more in the first two years of retirement than they should, 28 percent saying they’re at 120 percent (versus the 80) in spending, and 23 percent still at that 120 percent mark and that’s six years into retirement.^[6]

You don’t have to be a financial wizard or account to know that if you’re spending more in retirement than you did when you were working, money is going to dry up quicker and more easily than you believe.

A reasonable withdraw amount on the money you have saved is 4 percent, also known as the 4 percent rule, that would ensure your money is going to last for about 30 years.^[7]But that 4 percent has come under fire as being nearly impossible to maintain, given the rate of investment returns on the horizon, which makes budgeting and saving money before retirement that much more important.

You aren’t saving money in an emergency fund before and during retirement

Often times, you’ll hear those about to retire talk openly and almost in a giddy fashion about how they can’t wait to travel or spend money on lavish this, that or anything being that they’re done working and can “enjoy” what they want.

That “enjoyment” can translate into the aforementioned overspending, but what about the notion that you should still be saving money even as a retiree?

Novel idea, right?

You just spent the last 30 years of your career doing nothing but saving, so you can see why some might want to let loose and spend in a more frivolous way, but you should still be taking a look at being able to save money while you’re retired, even if that means just a simple tweak of your budget and eliminating expenses, since you aren’t in a position to change your income levels by going back to work, something you’ll work hard to avoid.

Maybe as part of scaling back, you can eliminate the obvious: a second vehicle that you and your significant other no longer need, or something as simple as the money you’ll save on gas for that non-existing work commute or having to buy new clothes every so many years for your job.

You could also consider selling off your larger estate and downsizing to a smaller home, something minus the upkeep as far as repairs goes, too.

The real moving and shaking occurs before you retire.

You’ll want to be somewhere in the neighborhood of 10 to 15 percent of each paycheck as far as how much should be set aside into an emergency fund, in order to have around $1 million dollars by the time you hit 67 years of age.^[8]

You don’t think you’ll outlive your money

You say to yourself, “I have plenty of money to last me for the next five or 10 years while I’m retired.” That is a foolish way to make assumptions based on your life expectancy.

A recent study said that, when using a 65 year old man in good health, that 61 percent of people underestimated his life expectancy, and that same 65 year old, good health and non-smoking man could live to be 90 (a 42 percent chance, in fact).^[9]

So if your end game is to spend money with the assumption that 75 is about how long you’ll live or suggest to yourself that if you’re retiring at 65 your money only has to last another 10 years or so, you could find yourself out of money when 75 years of age comes and goes, and you’re still doing just fine, health wise.

Money-wise, that’s another story.

One popular way to secure more income is through an annuity, which is a means of being able to secure income when you’re retired; this is an investment in an annuity, and it continually pays you on certain dates, typically on a monthly or quarterly basis.^[10]

Annuities often are what some retirees invest in if they’re devoid of a pension plan or some other means of receiving monthly payments as part of ongoing income after they’ve retired. They’re a solid investment, mostly due to the fact that there is no limit on how much you can put put into it, unlike a 401K, which caps it at a certain percentage and subsequent amount.

Retiring isn’t always looked upon favorably, and if you consider the ramifications of what is being asked of an individual or couple you can see why.

Retirement essentially is the act of living off what you’ve been able to save, with no longer having a secure income due to working.

That’s a scary endeavor if you aren’t planning appropriately, and you’ll in fact run out of money, and be forced back into the workforce at an advanced age, something no one really wants any part of moving forward.

While some retirees, as part of their plan, want to work or plan on working into retirement on some level, most are forced into working again.

Approximately 33 percent of retirees end up going back to work on some sort of full or part-time basis, with that range between 30 and 35 percent success rate depending on their income prior to retiring.^[11]

That same study showed that more people are working beyond 65, with 10.8 percent working past 65 as of 1985, jumping to current percentages just below 20 percent.

Does that mean we’re spending more, not saving enough or inflation and cost of goods far surpasses what we’re making? Whatever the reason, retiring is no longer become commonplace or even realistic for some.

But another important question you have to ask yourself is whether retirement has become unrealistic or the lack of savings and planning have taken a backseat from the masses? Not having enough to retire or running out of money isn’t exactly what you had in mind for your retirement years.