Avoid outliving your savings in retirement

Photo of a woman who has created a plan to ensure she doesn't outlive her savings in retirement.

Can you picture your retirement?

Even if it’s a long way off, think about what you want your money to do for you in that amazing Act 2 of your life. It’s a fun exercise. Go ahead and dream a little.

Maybe you want to pay off your mortgage, help your grandkids with college expenses, travel to the Top 10 art festivals in the country, or start a new business or hobby you don’t have time for during your working years. If you can picture what you want retirement to look like for you, it’s a lot easier to plan for it.

Find out how much money you may need

Ah, ignorance is bliss. But it won’t help you avoid outliving your savings in retirement if you want to make that dream come true.

“Start by looking at your history of spending. That’s who you are and how you live,” says Jenny Smith, financial advisor at Principal® in Des Moines, Iowa. “Then think about what will be different when you retire. What stops, starts, or changes between the last day of working and the first day of retirement?”

Once you know your rough annual income need, take a deeper look. “For example, if $100,000 a year is what it will take, break that down into how much you need every 30 days. If you need $7,000 a month, that’s $84,000 a year that needs to drop into your bank account,” Smith says.

Look at your spending history, know your rough annual income, and make sure at least some of your funds are in a very low risk position.

In that example, the remaining $16,000 a year could be for random, lump sum withdrawals as needed, like for a new furnace or an over-the-top vacation. Smith says to focus on keeping that money in low cost, highly liquid investments. “Make sure at least some of the funds are in a very low risk position in case you need money and the markets are down.”

Close the savings gap

If you’re seeing a big gap between what you’re estimated to have now and what you’ll eventually need, you have options.

  • Defer more money into your 401(k) retirement plan, especially if you’re not setting aside enough to get the full company match. Smith says to figure out how much it costs per week to put another 1% in your retirement plan. Make it bite-sized and it’s more doable. Then continue to bump your deferral another 1% as you can.
  • Add funds to a traditional Individual Retirement Account (IRA). Like a 401(k), it allows you to invest for the long-term and pay taxes on earnings later.
  • Make catch-up contributions to your 401(k) or IRA if you’re age 50 or more.
  • Every year, review how your retirement savings is invested.
  • Manage debt so you have more money in your budget for long-term savings. (Wondering how to pay off debt and save for retirement at the same time? Read 5 steps to balance both.)
  • Work longer, if you’re able. Delaying retirement by a year or two could help you boost your savings.
  • Work for a significant bump in income and save it. How? Consider things like changing jobs, trying for a promotion, or turning a side hustle into extra cash flow.

Handling your money after you retire

You’ve spent your working life saving that nest egg, and in retirement you’ll switch to spending it. That shift can feel pretty stressful. Set a realistic spending plan to guide you along the way. It helps.

3% a year is a safe retirement withdrawal rate."

“I tell my clients that 3% a year is a safe retirement withdrawal rate from their savings,” says Smith. “Generally, you’ll have a low risk of outliving your money if you keep your spending in the 3% to 4% range.”

“Not everyone has enough to do that, so an annuity that creates guaranteed retirement income the rest of their lives can make sense, too. “People are used to getting paid every 2 weeks. They know how to live on that,” Smith says. “Annuities, combined with other savings and Social Security, can be a good option.”

You can handle all these changes yourself with careful planning. Or ask a financial advisor for guidance. This is the kind of thing they do every day. They’re happy to help get you started on the roadmap to the retirement you’ve been dreaming about.

Next steps

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

The Retirement Wellness Planner information and Retirement Wellness Score are limited only to the inputs and other financial assumptions and is not intended to be a financial plan or investment advice from any company of the Principal Financial Group® or plan sponsor. This calculator only provides education which may be helpful in making personal financial decisions. Responsibility for those decisions is assumed by the participant, not the plan sponsor and not by any member of Principal®.  Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.

Increasing your contribution does not guarantee you put yourself in a better spot. Investing involves risk, including possible loss of principal.