Retirement is a balancing act. You want to spend enough to enjoy today, while preserving enough to take care of your needs tomorrow. If you keep things in balance, there is no reason you should run out of money. So what throws people off balance in retirement? Here are five things people do that puts them at risk of running out of money.
1. No measuring device. Imagine driving across the country with no fuel tank gauge. How often do you stop for gas? I suppose you'll have to guess. If you approach retirement income this way, you can get yourself in trouble. You must have a monitoring system in place.
This type of system measures how much you have left, your income needs, uses a conservative rate of return based on your investing style, and takes into account remaining life expectancy. Your retirement income gas gauge isn't only there to tell you when to slow down -- it can also tell you when there is room to step on the gas.
2. No spending plan. The No.1 reason people run out of money in retirement is they spend too much relative to the amount of financial assets they have. Most often excess spending occurs as parents help adult children, or because an upcoming retiree forgot to calculate expected taxes and health care expenses in their retirement budget.
When you retire, make a spending plan that lays out your monthly and annual expenditures, including money for fun. Now, add up your guaranteed sources of income, like Social Security. The amount of living expenses in excess of your guaranteed income must come from your savings and investments.
Make a projection assuming you take the desired withdrawals, and see how long the money lasts. Now, make the same projection, but assume you spend $5,000 more or less a year. This type of scenario modeling can show you how small changes in your spending can make the difference between having enough or running out.
3. Invest wrong. Your investment goal in retirement is not to maximize returns, nor, contrary to what many believe, is it to preserve principal. What most retirees want is sustainable lifelong income. This is not the time to go for the hot stock tip, nor is it the time to keep all your money in certificates of deposit.
This is the time to learn about the various investment philosophies for retirement income, and decide on the one most appropriate for you. Here are four approaches to consider:
-- The income-only approach: You only spend the interest and dividends that your investments generate.
-- The systematic withdrawal approach: You build a risk/return adjusted portfolio with a target annualized rate of return of about 6 to 7 percent and you plan on taking withdrawals of about 4 percent a year.
-- The time segmentation approach: You match investments to upcoming cash flow needs, so your safe investments are used for spending in the first 10 years of retirement, and your growth investments can be left alone to accumulate for years 11 and beyond.
-- The guaranteed income approach: You use annuity products to guarantee a lifelong income.
The secret to retirement investing success is to pick an approach and stick with it. Flip-flopping between investment approaches is bound to cause you harm.
4. No plan B. Life throws curveballs, and it will continue to do so in retirement. If your plan requires you to use every asset you have, you're at risk of running out of money. You need to allocate some of your assets to reserves -- this means the asset is not included in your plan as available to meet living expenses in retirement.
Reserves can be an emergency fund account, home equity, cash in the safe, a piece of land you own, or even a valued collectible. Hopefully you'll never need to tap into your reserves, but it may be you'll need it for health care expenses later in life, or to help an adult child who gets in trouble. There's no telling what might come up that throws your original plan off track. That's why you need assets set aside as plan B.
5. Fall for the scam. There will never be a shortage of people trying to part you from your money. In our own family, my great aunt had caregivers that embezzled hundreds of thousands of dollars from her in her last year of life.
Countless times, I've watched retirees fall for scams that promised them outstanding returns. As you age, your ability to process complex financial decisions declines. Unfortunately, you maintain a strong belief that you have the capacity to appropriately process such things. This is not a good combination.
Whether it be a family member or professional, you need a trusted advisor that you can turn to before making money decisions. You'll want to establish this relationship in your 50s or 60s. When faced with someone presenting you with an offer, it enables you to avoid feeling pressured by saying, "I don't make these decisions without consulting with my (trusted advisor name)." If it is a legitimate offer, the person presenting it to you should be happy to discuss it with your accountant, financial advisor, or family member that you rely on.
If you've appropriately accounted for the five things above, your retirement should be in good shape. If you haven't, well, it may sound overwhelming, but the planning process helps rid you of fear and anxiety. Once you've tackled these things, you can relax and enjoy retirement.
Dana Anspach , certified retirement planner, retirement management analyst, Kolbe Certified Consultant, is the founder of Sensible Money, LLC , a registered investment advisor with a focus on retirement income planning based in Arizona. She is the author of "Control Your Retirement Destiny" (Apress), writes for About.com as its Expert on MoneyOver55 and contributes to MarketWatch as a RetireMentor.
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