Running out of money in retirement is a growing concern for many seniors. With people living longer than ever before, retirement savings may not always last as long as needed. So what actually happens if you deplete your retirement funds? Here is an overview of the potential consequences and options to consider if you run out of retirement money.
Can You Run Out of Money in Retirement?
Yes, it is entirely possible to run out of money in retirement if you do not appropriately plan and budget for your post-work years. According to research from the Employee Benefit Research Institute, nearly half of today’s retirees are at risk of running out of money in retirement.
This can happen for several reasons:
- Not saving enough – If you do not save adequately during your working years, you may not have sufficient retirement savings to maintain your lifestyle for potentially 20+ years.
- Overspending – Retirees who spend too much too quickly increase their chances of depleting their nest egg. Things like extensive travel, expensive hobbies, and mortgage payments can drain retirement funds.
- Rising healthcare costs – As retirees age, healthcare expenses tend to increase significantly. These high and often unexpected costs can take a toll on retirement savings.
- Poor investing decisions – Making bad investment choices that lose value or do not keep up with inflation can diminish a retirement fund.
- Longer life expectancy – With continually increasing life expectancies, retirement funds have to last longer. Exhausting savings is a real danger for healthy retirees who live into their 80s, 90s or beyond.
- Market downturns – Stock market declines just before or during retirement can significantly reduce retirement savings. This can force retirees to liquidate assets at a loss.
While running out of money completely may not happen to all retirees, the danger is very real. Careful financial planning is key to help ensure retirement savings last as long as needed.
Consequences of Running Out of Retirement Savings
So what actually happens when retirement funds run dry? There are a number of potential consequences retirees can face:
- Reduced standard of living – The most immediate impact is a reduced standard of living. Running out of savings means less money to cover expenses, so retirees must find ways to cut back substantially.
- Difficult lifestyle adjustments – Significant lifestyle changes are required. Retirees may need to downsize their home, give up travel and leisure activities, eat out less, go without new vehicles, and reduce giving to charity, gifts, etc.
- Reliance on Social Security – Social Security becomes the key source, and possibly only source, of retirement income. The average 2023 monthly benefit is just $1,827, which is rarely enough to cover all living costs.
- Returning to work – Some retirees end up going back to work if their savings are exhausted. While working can supplement Social Security income, finding a job in one’s 70s or 80s can be challenging.
- Dependence on others – Moving in with children or other family members is another option some retirees rely on when they are broke. This can put stress on personal relationships.
- Debt problems – Those who run out of savings may turn to credit cards or personal loans to pay for expenses, resulting in growing debt. High amounts of debt can be very difficult to manage on limited income.
- Financial stress/anxiety – Depleting retirement savings often leads to significant emotional stress over finances. Constant budgeting and money worries can take a toll.
Clearly, running out of retirement funds can greatly reduce quality of life for seniors. Careful planning is key to avoid this fate.
How Much Money Do You Need in Retirement?
A pivotal question when planning for retirement is – just how much money do I need? Determining an accurate savings goal helps ensure you have enough funds that will ideally last your lifetime.
There are a variety of ways to calculate retirement savings targets. But a commonly recommended approach is to aim to replace around 80% of your pre-retirement income. This percentage is based on the assumption that many work-related costs like commuting and retirement savings contributions will be reduced in retirement.
Here is a table with estimates for how much yearly income may be needed in retirement based on pre-retirement earnings:
| Final pre-retirement salary | 80% target yearly retirement income |
|---|---|
| $40,000 | $32,000 |
| $60,000 | $48,000 |
| $100,000 | $80,000 |
| $150,000 | $120,000 |
This target number should then be multiplied by your estimated years in retirement. While individual situations vary greatly, aiming for around 20-25 years of retirement income is generally recommended.
So for example, someone earning $100,000 pre-retirement would aim to have around $1.6 million to $2 million saved by retirement ($80,000 yearly income x 20-25 years).
This simplified calculation illustrates that most retirees need substantial retirement savings in order to generate adequate ongoing income.
How Can You Avoid Running Out of Money?
The ideal scenario is putting in place a retirement plan that minimizes the risk of exhausting your financial resources during your later years. Here are some key tips to consider:
- Calculate your full retirement savings goal based on your desired income and estimated timeframe. This gives you a target number to work towards.
- Contribute as much as possible to retirement accounts like 401(k)s and IRAs while working. Maximize any employer match opportunities.
- Invest savings strategically – ensure your portfolio includes stocks and diversified assets that can grow faster than inflation long-term.
- Consider delaying Social Security benefits to age 70 if possible – this increases payments.
- Evaluate expenses honestly – understand how much retirement may realistically cost you and identify any areas to reduce spending.
- Consider relocating – moving to a lower cost of living area can stretch savings further.
- Include buffers like home equity that could be tapped in a worst case scenario via reverse mortgages.
- Purchase an annuity – these insurance products can provide guaranteed lifetime income.
- Develop an emergency fund for unexpected costs and bear markets early in retirement.
- Plan for long-term care needs which can impact savings significantly.
- Work with a retirement planning professional early on to ensure you are on track and fully prepared.
Proper preparation makes running out of money in retirement much less likely. But even well-laid plans can be thrown off track by unexpected events. Thorough planning, expense minimization, and adaptable income solutions are key.
What if You’ve Already Run Out of Retirement Savings?
For retirees who have already exhausted much or all of their retirement funds, the options to generate income become more limited. But here are some steps that may help:
- See if you qualify for any public assistance programs – things like food stamps, Medicaid, or disability benefits.
- Move in with family or downsize your housing significantly to reduce costs.
- Go back to work if possible – even part-time work can provide a needed income boost.
- Sell assets like your home, car, or valuables to generate funds.
- Rent out extra rooms in your home.
- Research senior community groups that may be able to provide financial assistance.
- Prioritize necessities like food, utilities, and medical care in your budget.
- Talk to creditors – they may be willing to negotiate reduced or delayed payments.
- Consider relocating to an area with a lower cost of living.
- Discuss options like reverse mortgages with a financial advisor – but be cautious of scams.
Running out of money in retirement is extremely challenging. In some cases, bankruptcy becomes the only option if debts cannot be paid. Prevention is always the best solution.
Conclusion
Exhausting your retirement savings is a real possibility for today’s retirees if not planned for properly. The consequences can range from reduced quality of life to significant emotional stress to forced major lifestyle changes – all unfavorable outcomes.
Diligent retirement planning, early high savings levels, expense minimization, risk mitigation tactics, and robust emergency backup funds can work to ensure your retirement security. Running out of money does not have to be inevitable fate with proper preparation. Discussing your unique situation with a financial advisor can also provide guidance on ensuring your golden years are financially secure.