Take These Steps to Make Your Money Last in Retirement

Key Takeaways

• To try to avoid an investing-related retirement shortfall, retirees should check their asset allocation to make sure they have enough growth, and a cost audit to check that they aren’t overpaying for their investments.
• A good way to boost return without adding to much risk is through the Bucket approach, where you’re holding roughly five to 10 years’ worth of portfolio withdrawals in a combination of cash and fixed-income investments.
• A best practice for people as they’re thinking about portfolio spending in retirement is to stay flexible, to stay plugged into how their portfolios are behaving.
• Retirees can consider potentially working longer if they are worried about shortfalls.
• Delaying Social Security can be a good strategy for people who have an average or above-average life expectancy, or if they think that their spouse will outlive them and will be reliant on that eventual Social Security benefit.
• Retirees who are concerned about potentially running out of money might consider some lifestyle changes, like cutting down on subscriptions, or larger-ticker items like downsizing.
• Paying an advisor to check over your portfolio can give you peace of mind and find potential shortfalls.

Margaret Giles: Hi, I’m Margaret Giles for Morningstar. Running out of money is a top concern for many retirees. Joining me to discuss some concrete steps to take to stave off a shortfall is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning. Christine, thanks for being here.

Christine Benz: Margaret, it’s great to see you.

Why Retirees Fear Portfolio Shortfalls

Giles: So, you often hear the anecdote that retirees are more afraid of running out of money than they are dying. What do you think contributes to that concern?

Benz: Well, one thing I would say is that an insurance company is behind that survey, and they really like to talk up this thing that people are worried about running out of money. But truly, people are concerned because they’re not sure what the future holds for their portfolio and market returns. They’re not sure what inflation might be like during their retirement drawdown period. And also personal considerations come into play as well. So, they might be concerned about their own longevity, especially if longevity runs in their family. Or hand in hand with that is long-term-care risk, that they might have enough money to tide them through their healthy years but then have effectively a balloon payment at the end of retirement that comes in and causes them to spend hundreds of thousands of dollars in some cases at the end of their lives. So, some of these concerns, I think, are quite legitimate.

Why Retirees Should Check Their Asset Allocation and Do a Cost Audit to Their Portfolio

Giles: All right, let’s talk about some of the steps that people can consider if they want to head off that retirement shortfall. And you’ve divided those into two groups, investing-related and those that aren’t. How about we start with the key investment steps?

Benz: Sure. So, you can take a good look at your portfolio, look at your portfolio’s asset allocation. One potential risk is if people have a portfolio that is too conservatively positioned for retirement, where they don’t have enough growth in that portfolio, well, that creates risk in terms of the portfolio’s ability to last over that really long time horizon. I think it’s also a great time to do a cost audit of your portfolio when you move into retirement, to look top to bottom at what you’re paying in terms of your investment fees. If you’re paying too much for your investments, well, that can be a significant drag on your portfolio’s return. So, I would focus on those two things as kind of a good overview of whether your portfolio’s on track.

How to Boost Return Without Adding Too Much Risk to Your Retirement Portfolio

Giles: OK. But you caution that people getting close to retirement can kind of go overboard in terms of adding risk to their portfolios in an effort to boost that potential return. So, how can they strike the right balance there?

Benz: Well, I like the idea of looking at your anticipated portfolio withdrawals and using those to guide how you position the portfolio. So, I often talk about this Bucket approach, where you’re holding roughly five to 10 years’ worth of portfolio withdrawals in a combination of cash and fixed-income investments. I think that’s a nice intuitive way to back into how much equity risk you can bear. So, any overage beyond that five to 10 years worth of portfolio withdrawals can go in higher-risk assets, mainly a globally diversified equity portfolio.

Why Retirees Should Stay Flexible in Their Spending Strategies

Giles: So, you also think retirees can spend smarter from their retirement portfolios in order to make them last. How can they do that?

Benz: Yeah, absolutely. A lot of the rules of thumb we see around retirement spending, like the 4% guideline, are built for a worst-case scenario so that they look back in history and say, “Well, what was the most you could’ve spent as a starting withdrawal over a 30-year horizon, even if you encountered a terrible market environment?” Well, most people’s retirement drawdowns are not a worst-case scenario. The market performs better than that. So, the key thing you can do is that you can build some kind of a spending system that is flexible, where you’re plugging into your portfolio’s value. You are potentially having to take less in a market downturn. But the counterpoint to that is that you can also take more when the market performs well. So, I think a best practice for people as they’re thinking about portfolio spending in retirement is to stay flexible, to stay plugged into how their portfolios are behaving.

Pros and Cons of Working Longer

Giles: That makes a lot of sense. So, let’s move away a little bit from the investment portfolio. You think a key step that they can consider is potentially working longer. What are the pros and cons of that?

Benz: Yeah, this is one that people don’t love to hear. But from a financial standpoint, it’s a home run, where you can forestall portfolio withdrawals, so you’re taking money over a shorter time horizon. You can continue to invest oftentimes. You can continue to enjoy some tax-deferred growth on your money. And you may also be able to employ strategies like delaying your Social Security filing, which has its own benefits, but the idea of working longer can help enable that strategy. On the downside, I often like to caution people that when we look at the data, we see a disconnect between when people expect that they will retire and when they actually do retire. And what we see is that people often do hang it up earlier than they thought they would due to situations outside of their control, so maybe their health issues or spousal health issues. Maybe they are forced out of the job earlier than they thought they would be. So, just build in some flexibility beyond that goal of working longer.

Who Should Consider Delaying Social Security?

Giles: Right. Now, you’ve already touched on this a little bit, but let’s talk about delaying Social Security as a potential strategy. What’s the benefit there, and who are the best candidates for holding off on taking their Social Security?

Benz: Yeah, definitely a financial benefit for delaying, especially if you think that you have average or above-average life expectancy. So, you pick up a roughly 8% inflation-adjusted increase in your eventual benefit for every year that you delay up until age 70. So, that is a really great “return” on your money. It’s also a great strategy for people to consider if they think that their spouse will outlive them and will be reliant on that eventual Social Security benefit. So, if you can enlarge that benefit for your spouse, that’s definitely a strategy worth pondering as well because it can help enlarge total lifetime income.

Lifestyle Changes Retirees Can Consider to Save Money

Giles: All right. So, you also think that retirees who are concerned about potentially running out of money might consider some lifestyle changes. So, what should they be thinking about there?

Benz: Right. So, take a look at your budget just as you would take a look at your budget at any point throughout your working career. See if you can tighten things up a little bit. Subscriptions, for example, are low-hanging fruit in a lot of households. Also look at maybe bigger-ticket budget items. So, and this is definitely not for everyone, but, if you’re part of a married couple and you each have your own car, maybe you can get by on one car. Or a really big-ticket lifestyle change to ponder would be making some changes to your housing. So, if you live in a home that is larger than you need and that might not be that aging-friendly, as you embark on retirement it can be a really great time to consider moving into some cheaper and more age-appropriate housing. And certainly relocating to a cheaper part of the country might be something to ponder. Again, not something for everyone, but if you live in a very high-cost part of the country, there may be an opportunity to move somewhere cheaper, even within your same geographic locale. But if you’re not having to commute anymore, for example, you might be willing to ponder some changes along those lines.

Why Hiring a Financial Advisor Can Be Money Well Spent for Retirees

Giles: All right. So, your last piece of advice might be a little bit counterintuitive for those who are concerned about running out of money. But that might be paying someone to help. So, why can that be so valuable?

Benz: Well, peace of mind. I think that there are a lot of people who have major anxiety about their portfolio’s ability to last. Get a financial advisor in to take a look at your plan, and you can pay that advisor either on an hourly basis or on a per-engagement basis. You don’t have to be all in with them for many years, but just pay for that one-time piece of professional advice and that can give you a lot more comfort in the totality of your plan. The advisor may pick up on some blind spots for you or may be able to make recommendations that wouldn’t have occurred to you. So, to me, that can be money well spent. Yes, it’s an outlay at a time when you might be feeling anxious about your money, but I do think that it can be money well spent.

Giles: That’s really helpful. Well, Christine, thanks for your insight and these concrete steps to consider.

Benz: Thank you so much, Margaret.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching.

Watch Your Investment Portfolio Is Probably Riskier Than You Think for more from Christine Benz.