How to Avoid Going Broke in Retirement

CBS MoneyWatch

With average U.S. life expectancy still rising, if you look after your health it's quite possible you might live into your late '80s or beyond. As a result, people who retire in their 60s could be retired for at least two or three decades. That should be a good thing -- except if you run out of money in your 70s or 80s!

If you're like most baby boomers, you haven't put enough away in retirement savings to maintain your current lifestyle, so you'll need to squeeze as much income as possible from what you did sock away. And unless you'll be receiving significant benefits from a traditional pension plan, which provides a lifetime monthly income, you should be certain to manage your retirement savings so you don't outlive it.

Unfortunately, research suggests many people simply "wing it" when it comes to retirement planning and drawing down their savings. They simply withdraw what they need for living expenses and hope the money lasts.

Hope is never good strategy! If you spend your retirement savings without planning, there's a good chance you'll go broke in your retirement years.

Let me instead introduce you to a better strategy to draw down and invest any type of retirement savings you have, whether a straightforward savings account with no special tax features; a 401(k), 403(b), 457 or cash-balance plan; or a traditional or Roth IRA.

Don't spend savings

When it comes to living off your retirement savings, the most important strategy you can adopt is this: Don't spend your savings!

Can that be right? Absolutely. The concern is that after immediately after retiring, you'll have accumulated a tidy sum to spend during retirement. It'll look like a lot of money, and you may think you can easily afford to buy that boat or take that expensive cruise you've been dreaming about. You might start spending your retirement savings on the things you've been planning for and pull out whatever you think you need to cover daily living expenses.

If you're not careful, you'll exhaust the balance in your retirement accounts before too many years have gone by. You may have plenty of years to live, but you'll be broke and faced with some hard choices, such as returning to work, drastically scaling back your living expenses or moving in with your kids.

Instead of spending haphazardly, what you should do is consider your retirement savings as a monthly retirement income generator. Spend no more than the amount of your paychecks. Since most of us already live paycheck to paycheck during our working lives, adhering to this financial discipline when we retire shouldn't be too hard. If you plan your spending in retirement, there's a good chance you won't go broke.

For the sake of convenience, I'm going to call these monthly retirement income generators "RIGs" for short. These RIGS are critical to creating a financially secure retirement. In order to better understand this concept, it might help to think of your RIGs as vehicles that will go the distance and carry you through a secure retirement. And as with cars and trucks, RIGs come in several models with a variety of extras that can be customized to suit your needs.

But don't feel overwhelmed. There are only three basic types of RIGs you can use to generate retirement income from savings (which I discuss in detail in my latest book, "Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck"). To help you create a financially secure retirement, my next few upcoming posts will summarize these three types of RIGs and discusses their variations. Stay tuned!

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