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How to Avoid the Risk of Running Out of Money During Retirement

Running out of money is one of the biggest worries of retirement. Allianz is a huge financial firm, and they did a survey of a broad spectrum of working Americans in 2015 and found that 77 percent of them feared not having enough money in retirement more than death; that number went to 82 percent for those who were married with dependents.  This is a huge worry!  
Obviously, retirement income is on our minds. With the defined benefit pension plans long gone and Social Security cutting benefits by forcing them to be taxed, plus lowering cost of living adjustments, retirement income looks bleak.
So, let’s discuss why this fear is so big for some:
First, no written financial plan. According to a Princeton survey in 2013, 43 percent of Americans have no financial plan, or a very limited one. Another 38 percent have a basic plan, leaving only 19 percent who have done a comprehensive financial plan. Although you would like to think that the 19 percent are only wealthy people, less than half of them report an income of over $100,000.
Think about why the answers to the following questions matter so much. First, do you know how much you need or want to live on in retirement? Have you taken the time to sit down and make a plan of what you need with a financial professional to give you some advice? Second, do you know how much you need to save each month to get there? Third, is your route to get there predictable, or is the route full of surprises and problems that could stop you from getting there?
Suppose we have a map that looks like this:
If your desire was to get to that star, what two things would you need to know to get there? First, you’d need to know where the star is, exactly. Second, you’d need to know where you are located right now in relation to the star to plan your route.
This is just like financial planning.

  1. You need to take a financial inventory to know where you are, financially. You need to list your assets and your liabilities (debts); this will establish your net worth, which is the total of your assets, minus your liabilities.
  2. You need to talk about how many years you have until you want to retire and decide what percentage of your current income you need at retirement, assuming you have no debt.
  3. You need to see how much you must save each month to get there.

Having a written financial plan like this takes the stress and emotion out of retirement, and allows you to get out there and live better, create surplus, and create a real, comfortable retirement.
Second, bad spending habits. According to the debt statistics listed above, we Americans have bad spending habits. We have a difficult time putting off spending now for something we want, which leads to debt, which then leads to not being able to create a surplus each month to save for retirement, or an emergency.
This is one of my favorite quotes from Zig Ziglar:

“The chief cause of failure and unhappiness is trading what you want most, for what you want right now.”

Overspending is the major reason Americans don’t have a secure retirement. We all make enough money in our lifetimes to retire more than comfortably, but we lack the discipline and the foresight to put off immediate luxuries for future financial security. I’ve had the opportunity to sit down and interview wealthy people, some family, some friends, some professionals, and I’ve asked them every time, “how did you acquire your wealth?” Without exception they all answered, “I spend less than I make.” It’s that simple.
Third, market risk.  The year 2008 spooked a lot of people, and the chances of something like that happening again are fairly high. So many have their funds in speculative investments, and have nobody in the financial world helping them with them. Many of us don’t know what our money is in, understand the fees or costs, track the investments, or havethe-richest-man-in-babylon-review the time to do so. So, inevitably market risk comes, and emotional decisions are made. The Richest Man in Babylon is one of the seminal books on finances for our generation. In it there are Seven Cures for a Lean Purse, meaning, seven ways to become wealthy. The one that is pertinent with regards to market risk is this:

“Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable and where thou wilt not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments.”

Fourth, not having guaranteed income. Referring back to your grandpa’s retirement, we see that the older generation had guaranteed retirement income, called a pension. That meant he was told before and at retirement how much he could expect on a monthly basis for the rest of his life, and most of the time that included an option for your grandma as well to receive lifetime income.
Since we made the switch to 401(k) plans, we don’t have that guaranteed income. What happens when most people retire is that they end up not spending much because they are scared.
Here’s a common scenario: a person works hard, and accumulates $500,000 in their retirement plan. At age 67, they retire on full Social Security and start drawing on their retirement funds. The first year they pull out $50,000, and live comfortably with their Social Security funds as well. However, doing some quick math, that will only let them go 10 years with that kind of income. That scares them, so they stop spending, and also stop enjoying retirement. This has gotten so common, that this is the way most people retire, scared of the fact that if the accounts they have worked so hard to build up ever take dips, AND they have to draw on those funds for income, it exponentially lowers the amount of time before their money will run out.
For specific help with creating a predictable retirement with income that you cannot outlive, contact me:  peter@moneymastery.com.

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