How to Avoid Running Out of Money in Retirement

During my years as an advisor helping clients to put together a retirement plan, I thought of my task as twofold. The first part of the task was to build up enough assets to fund a comfortable retirement. The second part, and equally important, was to make sure that clients don’t blow their nest egg due to mistakes that can be avoided.

Money Worries

Mistakes are a normal part of everyone’s financial journey. However, one major mistake, according to a recent Bankrate.com survey, is not saving enough for retirement. The majority (77%) of U.S. adults have financial regrets, and 22% of people regret not saving for retirement early enough. Another recent Bankrate.com survey found the following…

• 52% of American adults say money negatively impacts their lives.
• 56% of women and 47% of men experience mental health issues due to financial stress.
• 29% of adults say they worry daily about money.

The Bankrate survey covered every demographic, with most of the respondents employed and of working age. When you near or are in retirement, you must cope with different financial realities. First, the regular paycheck stops. Your income becomes Social Security, possibly a pension – if you are lucky – and hopefully, retirement savings in a 401(k) and/or IRA, as well as perhaps a personal savings or brokerage account. For retirees, the combination of not having a job and needing to stretch their assets for the rest of their lives (possibly 30+ years), plus fears of a bear market, can turn financial stress into an everyday experience.

The Rule of 72 and Warren Buffett

I would often meet clients in my office. That’s where I kept a chart of how Warren Buffett grew his wealth from next-to-nothing to multi-billions of dollars. Of course, very few have his investing acumen. But it got clients into the right mindset. The chart showed that Buffett had a mere $10,000 at age 19, and just $20,000 at 21. His wealth then jumped to $1 million at age 30, and $1 billion at age 56 in 1986. Today, and even after donating over $111 billion of Berkshire Hathaway (BRK.A) stock, he is the 5th wealthiest person on the planet. From age 56 on, he grew his wealth by 200 times! His secret was compounding, which Buffett described as a “snowball.” He said, “The important thing is finding wet snow and a really long hill.” The “wet snow” is the right investment(s), and the “really long hill” is time. The secret of financial markets is that the magic of compounding allows even small investments to grow exponentially. The greater the number of compounding periods (Buffett’s long hill), the greater the potential returns on capital invested. For example, $20 invested per week from the age of 21, at a reasonable annual return rate of 7%, would grow to about $106,300 in 30 years, and to over $331,000 at a retirement age of 66. A useful tool is the Rule of 72, which is a quick method for determining how long it will take to double the money you invest. For instance, if your money grows by 8% annually, divide 72 by 8 to get the number of years it takes for your money to double. In this case, 72 divided by 8 is 9, and it would take 9 years to double your money. Of course, the return rate can be higher or lower, but it does show the power of compounding.

Not Losing Your Nest Egg

Now comes the tougher part for retirees – making sure your nest egg doesn’t get broken. Traditional financial planning guidance recommends a balanced portfolio of both stocks and bonds and a retirement income withdrawal of no more than 4% per year. I never cared for the traditional approach. First of all, I feel too much is allocated to bonds. I preferred shorter-term instruments, such as Treasury bills, as well as alternatives like gold for a small percentage of the portfolio allocation. Over the past 20 years or so, gold (GCZ24) has performed much better than the other classic diversifying hedge for a stock portfolio – bonds – even though its returns have been inconsistent. As The Financial Times’ Robert Armstrong wrote, “Gold was a better hedge than bonds in the great financial crisis, at the end of 2018, and in the 2022 inflation/rates rout. Only in the dotcom bust were bonds superior, and gold was still up then. Gold is a quite good asset for risk-off moments.” Next, 4% may not be enough income to support your retirement lifestyle. Consider that 4% of a million dollars is just $40,000. Most people with a million in retirement savings would hope for more income. In addition, studies show that with the traditional balanced portfolio and a 4% withdrawal rate, you have at least a 20% chance of running out of money before you run out of time. This scenario can become reality if a stock market bear hits. Think back to the 2008-09 bear market. The S&P 500 Index ($SPX) lost 38.5% in 2008, and from its peak on August 28, 2008, the S&P 500 fell 48% in a little over six months to its low on March 9, 2009. For many people approaching, or already in, retirement, it was a disaster. There were so many people forced to work for a decade (or more) longer than they planned. My approach for clients was better. I told clients to lower your stock exposure (which normally was kept at 110 minus their age) for a year or so before their planned retirement date and keep it there for about a year before rebuilding the stock portfolio back up. This avoids the danger of a market crash wiping out your plans for the future. But raising the exposure to stocks again is crucial. Here’s why… On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses. This amount is up nearly 5% from 2023, and goes up every year. If you’re a retiree, you need to have your portfolio outgrow the cost of medical care. Of course, every person’s circumstances are different. So, having a financial plan specifically tailored to your circumstances is crucial to you having a comfortable retirement with less money worries.