Editor’s Note: This story originally appeared on NewRetirement.
If you are worried about running out of money in retirement, you are not alone. Running out of money is the main concern of most people in or approaching retirement. And, there is very good reason to be concerned.
Let’s explore this fear. Are you right to be scared? What can you do about your concerns?
Study after study reveals that running out of money is the No. 1 thing that scares people about retirement.
You Are Actually Right to Feel Fear
A study released by the American Institute of CPAs (AICPA) reported that 57% of financial planners said running out of money was the top retirement concern for their clients.
And according to a detailed report by the Employee Benefit Research Institute (EBRI), many of us are in fact very likely to run out of money — no matter our income level. The EBRI’s Retirement Security Projection Model predicts that, overall, 40.6% of all U.S. households where the head of household is between 35 and 64 are projected to run short of money in retirement.
And, while the data varies dramatically with people’s pre-retirement income levels, not even those in the highest income quartile are immune from running out:
- 83% of baby boomers in the lowest income quartile will run out of money in retirement.
- 47% of boomers in the second-lowest quartile will run out.
- 28% of boomers in the second-highest quartile will run out.
- 13% of boomers in the highest income quartile will run out.
The above data refers to people who will be retired for 35 years. The data is only slightly better if you are living in retirement for 20 years — but even then a full 81% of the lowest income quartile and 8% in the highest income quartile will run out of money.
Almost 1 in 10 of the very richest among us will run out of money in retirement? Yikes!
Why Is Running Out of Money a Growing Worry?
There are a variety of very real and tangible factors that are contributing to increased concern and increased risk of running out of money.
Longer lives, less proactive saving, higher costs, stagnant wages and fewer people with pension plans are some of the key reasons that more of us are at risk of outliving our assets.
So what happens if you do run out of money in retirement?
First, the good news: Running out of money in retirement — in these scenarios — does not mean that you are completely penniless.
Running out of money usually means that you have used up all of your retirement savings and your home equity and are left with whatever income streams you might have — Social Security or a pension if you are lucky.
Most people who run out of money in retirement continue to scrimp by — living on Social Security income, pursuing a part-time job and perhaps dramatically cutting costs.
And, the bad news?
You are likely no longer in your own home and may be enrolled in low-income programs or are relying on family for shelter or support. You are probably now part of Medicaid instead of Medicare. You are probably living in poverty or at a very low income level.
Will You Run Out of Assets in Retirement?
The answer of course depends on hundreds of different factors.
To find out if you will run out of money, you need to evaluate your risk using both optimistic and pessimistic scenarios.
The NewRetirement Retirement Planner makes it easy to get started and take action.
NewRetirement offers the best do-it-yourself retirement planning software online. The system is completely comprehensive, and it provides you with reliable answers about your prospects for a secure future.
Here are a few other steps you can take.
1. Detail Your Current and Future Finances
The best way to avoid running out of money in retirement is to have a very good, detailed and completely personalized retirement plan — totally based on you and your needs.
To start, you will want to:
- Document your current situation in as much detail as possible.
- Imagine the specifics of your future and plan for big and small tweaks and changes that will enable you to achieve the retirement you want to have — without running out of money.
2. Address Medical and Potential Long-Term Care Costs
High medical costs and long-term care costs are big reasons why people run out of money in retirement. These costs usually occur near the end of your life.
About 70% of people who reach age 65 will need some type of long-term care in their lifetime, according to the U.S. Department of Health and Human Services, but few are prepared to pay for that care. The costs of long-term care are exorbitant — ranging, typically, from $51,000 to $102,000 a year according to one survey — and are not covered by Medicare.
If you are worried about running out, it is best to plan for covering these costs. The NewRetirement Retirement Planner will help you estimate medical costs. You can also run scenarios for different ways to cover long-term care.
3. Tweak Your Situation and Discover What Works
Try out any of the following tweaks to your plan to strengthen your prospects and feel more confident about your future:
- Work longer before retirement.
- Work part time after retirement.
- Reduce expenses now? Reduce them more in five years? Prioritize and only spend on what is most important to you.
- Downsize.
- Get a roommate.
- Reduce costs by moving abroad.
- Start saving more now than you already do. (Here are 22 easy ways to save more.)
- Add insurance products.
- Reduce medical expenses.
- Add passive income to your financial plan.
- Create a plan for long-term care expenses.
- Consider the purchase of a lifetime annuity to ensure lifetime income.
- Delay the start of Social Security, which maximizes your guaranteed retirement income.
- Tap into your home equity by downsizing or with a reverse mortgage.
- Get rid of high-interest debt.
- Optimize your investment strategies. Get higher rates of returns.
- And so much more …
You don’t have to worry. Get started, create and improve your retirement plans now.