Of all the questions people ask me, none is more frequent than some variation of this: How can I make sure I have enough money when I’m retired?
Some people ask it while they’re working and building their savings. Others are already retired and wondering how to stretch what they have.
Lest you think I have some magic-bullet new answer that will totally and easily solve this, let me pass along a little straight talk:
In its most elemental form, this question — and any reasonable answer — cannot escape the fundamental equation of money-in and money-out.
• Leading up to retirement: If you save more, you’ll have more to spend when you’re retired. If you save less, you’ll have less to spend.
• Likewise, when you’re retired, if you spend more, you’ll have less; if you spend less, you’ll have more.
Like gravity, that equation doesn’t make exceptions, even for deserving folks like us. Some of the fallout is beyond our control. However, once we accept the notion that we must live within that overall constraint, we have plenty of options to improve our positions.
Here are 10 parts of the answer that are within our control. I’ve broken it down into two phases: preretirement and retirement.
Phase 1: Preretirement
One: Save more money. I know, this is so obvious, but it’s absolutely fundamental, and the earlier you apply it, the more you will benefit. If you think you’re already saving as much as you can, you have plenty of company.
But if you really look, you’ll probably find opportunities to increase your savings. Next time you get a bonus or a bit of unexpected income, set aside half of it to add to your retirement savings. You could do the same when you get a raise at work or a gift of money.
Two: Invest more efficiently. The easiest way to do this is to reduce your costs. If you can do so without incurring capital-gains taxes, move your money into funds with lower expenses. Index funds are ideal for this. Every dollar you save in expenses is an extra dollar that’s working for you instead of working for Wall Street.
Three: Take a little more risk in your investments. If you take a smart risk, this is likely to increase your long-term return.
Here are two smart risks that could do the trick.
• Shift an additional 10% of your portfolio from fixed income to equity funds. Over time, that is likely to add two to six basis points to your long-term return. That might not seem like much, but it can make a big difference by the time you retire.
• Shift some of your equity investments into large-cap value funds or small-cap value funds. This has the potential to make a huge long-term difference.
Four: If you’re contributing to a 401(k) or similar plan through work, make sure you’re saving enough to capture the maximum matching funds from your employer. If you fail to do this, you’re turning down what is essentially free money.
Five: If you contribute to an IRA, make it a Roth IRA. If you are eligible to designate your 401(k) or similar plan as a Roth, do that, too. Your eventual reward will be the ability to take out tax-free money in retirement. Trust me on this: When you get there, you will like that.
Phase 2: Retirement
Six: Retire later.
Every extra year that you continue working and saving is a year that you:
• Add money to your retirement pool instead of take it out.
• Potentially add to the Social Security benefits you’ll get.
• Reduce the number of years your portfolio will need to provide for you.
• Let your savings continue growing.
If for some perverse reason the market declines during a year when you’re postponing retirement, it will be a year that you won’t be further eroding your savings by taking money out.
If you can delay your retirement by five years, you will be on track to double your retirement income.
Seven: Move to where the cost of living is lower. This of course is a big change in lifestyle that might bring many challenges and many benefits — or both. In general, housing costs considerably less in the middle of the country than in the East or the West coasts.
Read: Kathie Lee Gifford was ‘dying of loneliness’ in retirement: Here’s what she did to fix it
You might be able to retire in Tennessee or Mississippi for half the cost of retiring in California, Oregon or New York state, for example. Here’s a recent article that compares retirement costs in all 50 states.
This topic is popular fodder for journalists who like to make lists of cities and counties, so you can find lots more information easily.
Eight: This is closely related to the last point and to the “fundamental equation” I mentioned earlier: Spend less money when you’re retired.
Specifically, take lower withdrawals from your portfolio. If you can make ends meet taking out 3% of your portfolio each year instead of 4%, you’ll make your money last longer and dramatically reduce the probability of running out of money.
If this helps your portfolio grow substantially during a bull market, consider increasing your withdrawal rate to take advantage of the growth. Use this additional “income” for nonessentials, so you can cut back when the market declines, as it is sure to do.
Nine: Acquire a “pension” by using part of your portfolio to buy a single-premium life annuity. This step will reduce the size of your portfolio and the amount you may be able to leave to your heirs.
But it will give you considerably more income than you’re likely to get from the same amount left in a bond fund. For example, your return currently could be a guaranteed 6.6%, for the rest of your life, with less than 25% of it subject to income tax.
Ten: Stop giving money away! This may disappoint your favorite nonprofits and your children. Your response can be simple.
• To your children: “We’re trying to make sure we don’t become a financial burden to you.”
• To charities: “We haven’t stopped caring about the great work you do. When we’re gone, you’ll get some of our remaining assets to support that work.”
These suggestions should go a long way to help you have a better retirement. You will undoubtedly find other ideas if you put your mind to it.
For more thoughts along these lines, check out my latest podcast, “20 Ways to double your income in retirement.”
Richard Buck contributed to this article.