2 Ways to Avoid Running Out of Money in Retirement
Written by
Gabrielle Olya
Edited by
Ashleigh Ray
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Many Americans fear running out of money in retirement. A 2023 GOBankingRates survey found this to be the No. 1 financial concern about retirement, with over half of Americans (59%) worried that they won’t have enough to fund their golden years.
While this fear can unfortunately become a reality without the proper planning, the good news is that it can be avoided. New research from Morningstar found that there are two things that can help most Americans avoid falling short financially in retirement — here’s what they are.
Invest in a Workplace Retirement Account
The Morningstar research found that 57% of those not participating at all in a defined contribution plan — such as a 401(k) or 403(b) — may run short of money in retirement, compared with only 21% for those with 20 or more years of future participation in a defined contribution plan.
“Saving to a tax-deferred retirement account over many years is the single best way to never run out of money in retirement,” said Doug Carey, a chartered financial analyst and the president of WealthTrace.
“I always recommend that people begin saving to a tax-deferred retirement account as soon as possible.”
While saving consistently over the long term is a sound strategy, it’s also important that you are investing a sufficient amount over those years.
“The benefit of long-term saving in tax-advantaged accounts is the power of compound growth,” said Zack Swad, the president and wealth manager at Swad Wealth Management. “When individuals contribute consistently over two decades or more, the earnings on investments can compound, significantly boosting retirement savings.
“However, this is only truly effective if (1) individuals are contributing enough to their accounts — e.g., at least 10% to 15% of their income; (2) they’re taking full advantage of any employer match (if available), which is essentially free money; and (3) the investments are invested appropriately,” he continued.
“Simply contributing for 20 years isn’t enough if the contributions are too small or poorly allocated.”
Delay Your Retirement
This might not be what you want to hear, but delaying your retirement is one of the best ways to avoid running out of money. The Morningstar research found that only about 28% of U.S. households would experience financial shortfalls if they retire at age 70, compared to 45% if retiring at age 65.
“Waiting until age 70 to retire allows for larger Social Security benefits,” Swad said. “Each year past the full retirement age — typically around 66 to 67– increases benefits by about 8%, which can lead to a substantial increase in guaranteed lifetime income.
“Additionally, delaying retirement reduces the number of years drawing down savings, allowing more time for investments to grow.”
However, there are caveats to this strategy as well.
“This strategy hinges on (1) individuals being healthy enough to work until 70, which may not be feasible for everyone; (2) ensuring they have sufficient savings or other income sources to support themselves if unexpected job loss or health issues occur before 70; and (3) the individual being properly invested for their retirement horizon, as delaying retirement doesn’t help if their portfolio doesn’t perform well,” Swad noted.
Other Considerations
Saving sufficiently and consistently over a long period of time and delaying retirement are two sound strategies to avoid running out of money, but there are other things to take into account when planning for retirement.
“It’s crucial to consider lifestyle and spending needs in retirement,” said Swad. “Saving in a 401(k) for 20 years and retiring at 70 won’t be enough if future expenses, such as healthcare costs, are underestimated. Individuals should plan for inflation, healthcare and longevity risks, making sure their retirement assets align with their expected lifespan and costs.
“Overall, these methods are effective,” he continued, “but they need to be part of a broader financial plan that includes strategic savings, proper investment management and risk considerations.”
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