Retirement is most people’s largest single financial goal they’ll have in their lifetime. One of the biggest financial concerns people have and a major financial mistake to avoid: running out of money in retirement. There’s a number of different factors that can play into someone running out of money in retirement. The two most common mistakes are unexpected health expenses and withdrawing too much from savings and investments.
Avoid Running Out Of Money In Retirement
Unexpected health expenses can be taken care of with the proper health insurance for those who are under 65 years old. Medicare supplement insurance is a great option for those over 65 years old. Additionally, the most commonly skipped type of insurance, long term care. If you have those checked off the list, you’re likely going to avoid running out of money in retirement because of health care expenses.
Taking too much money from the nest egg is a little tricker. If you’re someone that will be taking money out of your investments on a regular monthly basis, most studies show, if you take no more than 4% from your nest egg, that you are not likely to run out of money in retirement. The higher the percentage you take, the higher likelihood you have of running out of money.
Financial Planning For Retirement
A common financial mistake to avoid for retirement that I see far too often is when people take out much more money than what they need to live on. We will look at an example of why this is a bad idea.
The documented rate of returns of the last 25 years in the S&P 500 index (500 largest US stocks) is in the chart below. This example assumes a person retires at age 62 and lives until 87 years old. In this scenario, they take $50k/year from their $500k savings and investments from an all stock portfolio in the S&P 500 index.
Generally speaking, I’d suggest diversifying into more assets such as stocks, bonds, real estate, and alternative investments rather than just having everything held in stocks. However, for this specific example, we’ll keep it simple.
Running Out Of Money In Retirement Example:
Bob has a $500,000 IRA that he wants to take $50k/year from that money for the rest of his life. Here’s how that scenario would play out:
Year |
S&P 500 Rate of Returns |
Withdraw |
Account Value |
| Start of 1996 | $ 500,000 | ||
| 1996 | 20% | $ 50,000 | $ 550,000 |
| 1997 | 31% | $ 50,000 | $ 670,500 |
| 1998 | 27% | $ 50,000 | $ 801,535 |
| 1999 | 20% | $ 50,000 | $ 911,842 |
| 2000 | -10% | $ 50,000 | $ 770,657 |
| 2001 | -13% | $ 50,000 | $ 620,472 |
| 2002 | -23% | $ 50,000 | $ 427,717 |
| 2003 | 26% | $ 50,000 | $ 488,923 |
| 2004 | 9% | $ 50,000 | $ 482,926 |
| 2005 | 3% | $ 50,000 | $ 447,414 |
| 2006 | 14% | $ 50,000 | $ 460,051 |
| 2007 | 4% | $ 50,000 | $ 428,453 |
| 2008 | -38% | $ 50,000 | $ 215,641 |
| 2009 | 23% | $ 50,000 | $ 215,238 |
| 2010 | 13% | $ 50,000 | $ 193,219 |
| 2011 | 0% | $ 50,000 | $ 61,837 |
| 2012 | 13% | $ 50,000 | $ 111,837 |
| 2013 | 30% | $ 50,000 | $ 95,388 |
| 2014 | 11% | $ 50,000 | $ 55,881 |
| 2015 | -1% | $ 50,000 | $ 5,322 |
| 2016 | 10% | $ 50,000 | $ 0 |
| 2017 | 19% | $ 50,000 | SOL |
| 2018 | -6% | $ 50,000 | SOL |
| 2019 | 29% | $ 50,000 | SOL |
| 2020 | 16% | $ 50,000 | SOL |
| 2021 | 22% | $ 50,000 | SOL |
Are You Running Out Of Money In Retirement?
Bob started off in the best timeframe in recorded stock market history in the late 1990s, which initially helped catapult his account. That is, until the negative years started to dwindle his savings away. In this example what did him in was 2008 because he was withdrawing such a high percentage of money and was never able to recover those loses. He could have avoided the biggest financial mistake: running out of money in retirement, but did not create a proper financial plan to do so.
If he hadn’t been taking as much money from retirement savings and investing this whole time, he would have avoided the financial mistake of running out of cash in retirement. Instead, at 81 years old he ran out of money. This is not the place you want to be at that age because I don’t know many 80 year olds itching to go to back to work.
If Bob instead took only 4% of the initial amount or $20k/year, this is what would have happened to his account value:
Year |
ROR |
Withdraw |
Account Value |
| Start of 1996 | $ 500,000 | ||
| 1996 | 20% | $20,000 | $ 580,000 |
| 1997 | 31% | $20,000 | $ 739,800 |
| 1998 | 27% | $20,000 | $ 919,546 |
| 1999 | 20% | $20,000 | $ 1,083,455 |
| 2000 | -10% | $20,000 | $ 955,110 |
| 2001 | -13% | $20,000 | $ 810,946 |
| 2002 | -23% | $20,000 | $ 604,428 |
| 2003 | 26% | $20,000 | $ 741,579 |
| 2004 | 9% | $20,000 | $ 788,321 |
| 2005 | 3% | $20,000 | $ 791,971 |
| 2006 | 14% | $20,000 | $ 882,847 |
| 2007 | 4% | $20,000 | $ 898,161 |
| 2008 | -38% | $20,000 | $ 536,860 |
| 2009 | 23% | $20,000 | $ 640,338 |
| 2010 | 13% | $20,000 | $ 703,582 |
| 2011 | 0% | $20,000 | $ 683,582 |
| 2012 | 13% | $20,000 | $ 752,448 |
| 2013 | 30% | $20,000 | $ 958,182 |
| 2014 | 11% | $20,000 | $ 1,043,582 |
| 2015 | -1% | $20,000 | $ 1,013,145 |
| 2016 | 10% | $20,000 | $ 1,094,461 |
| 2017 | 19% | $20,000 | $ 1,282,409 |
| 2018 | -6% | $20,000 | $ 1,185,646 |
| 2019 | 29% | $20,000 | $ 1,509,249 |
| 2020 | 16% | $20,000 | $ 1,730,729 |
| 2021 | 22% | $20,000 | $ 2,091,489 |
In most cases, over time, people need more money because of inflation. $20k in 1996 was worth a lot more than $20k in 2021. So, let’s account for that with a 2.5% inflation rate on the amount of withdrawals each year:
Year |
ROR |
Withdraw |
Account Value |
| Start of 1996 | $ 500,000 | ||
| 1996 | 20% | $20,000 | $ 580,000 |
| 1997 | 31% | $20,500 | $ 739,300 |
| 1998 | 27% | $21,013 | $ 917,898 |
| 1999 | 20% | $21,538 | $ 1,079,939 |
| 2000 | -10% | $22,076 | $ 949,869 |
| 2001 | -13% | $22,628 | $ 803,758 |
| 2002 | -23% | $23,194 | $ 595,700 |
| 2003 | 26% | $23,774 | $ 726,808 |
| 2004 | 9% | $24,368 | $ 767,853 |
| 2005 | 3% | $24,977 | $ 765,912 |
| 2006 | 14% | $25,601 | $ 847,539 |
| 2007 | 4% | $26,241 | $ 855,200 |
| 2008 | -38% | $26,897 | $ 503,327 |
| 2009 | 23% | $27,569 | $ 591,523 |
| 2010 | 13% | $28,258 | $ 640,163 |
| 2011 | 0% | $28,944 | $ 611,219 |
| 2012 | 13% | $29,668 | $ 661,009 |
| 2013 | 30% | $30,410 | $ 828,902 |
| 2014 | 11% | $31,170 | $ 888,911 |
| 2015 | -1% | $31,949 | $ 848,073 |
| 2016 | 10% | $32,748 | $ 900,132 |
| 2017 | 19% | $33,567 | $ 1,037,590 |
| 2018 | -6% | $34,406 | $ 940,929 |
| 2019 | 29% | $35,266 | $ 1,178,532 |
| 2020 | 16% | $36,148 | $ 1,330,949 |
| 2021 | 22% | $37,052 | $ 1,586,706 |
What If I Run Out Of Money In Retirement?
If someone lives long enough and is taking too much from their portfolio from the beginning, this can be a 1 way ticket to running out of money in retirement. Taking around 4% from your retirement savings is a safe financial model to reference. Withdrawing less than 4% will likely ensure you will not run out of money in retirement. The numbers in the S&P 500 include some of the best returns of the late 90s and 2009-today, but it also includes the devastating drops in 2000-2002 and 2008.
For those that plan on being around for a while, stocks can be a great tool to help outpace inflation and grow an account balance. However, long timeframes of down markets have historically happened during 30 year stretches in the stock market. So, just because the stock market is riding high doesn’t mean you should now take all those gains. Your account balance is likely to need those gains down the road in order to offset a drop in stocks similar to what happened in 2000-2002 and in 2008.
Retirement Financial Planning
Less is more when it comes to withdrawing money in retirement. Taking too high of a percentage of your portfolio compounded with stock market fluctuation can demolish a retirement plan. From the example above, Bob needs closer to $50k/year. So, his financial retirement options would be to work a part time job that can make up the difference or wait longer to retire. There’s no magic answer to growing investments accounts. Real financial return takes time and consistency. There are no short cuts with either of them. Withdrawing around 4-5% annually, combined with a diversified portfolio (meaning not all stocks), is a tested method to making sure your money out lives you.
Start planning your finances for retirement today by calling me directly at (609) 439-1687 or sending an email to dan@clientfocusedfin.com. You can also send me a message directly from the Contact page.