3 Steps to Avoid Running Out of Money in Retirement

Many pre-retirees worry that once they stop working and age, they'll face health issues, boredom, and social isolation. But there's one fear you can't ignore in the course of your retirement planning: running out of money.

Even if you kick off retirement with a few million dollars in your IRA or 401(k), there's a risk of depleting your nest egg. But with the right strategy, you can mitigate it significantly. Here are three steps to avoid ending up with $0 in retirement savings.

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1. Start with a safe withdrawal rate

The key to stretching your nest egg in retirement is figuring out how much money you can safely withdraw each year. You could use the popular 4% rule, which has you withdrawing 4% of your balance in your first year of retirement and adjusting future withdrawals for inflation. But you'll need to make sure your investment mix is appropriate for that guidance.

The 4% rule largely assumes an equal mix of stocks and bonds. If your portfolio is more bond-heavy because you're someone who hates risk, a 4% withdrawal rate may be too aggressive for you. In that case, a 3% or 3.5% withdrawal rate may be safer, depending on your portfolio's specific composition.

The key, therefore, isn't just to choose a withdrawal rate because it's commonly used. Rather, that rate should hinge on how you have your money invested and the growth your portfolio lends to.

And if your instinct is to keep 100% of your money in safe investments to avoid potential losses, just remember that doing so exposes you to another risk: stagnant growth. Put another way, an overly cautious approach to investing in retirement could increase your chances of ending up with nothing.

2. Adjust withdrawals during down markets

Even a solid withdrawal strategy might need to be tweaked when the stock market doesn't cooperate. If you want to avoid running out of savings, be prepared to adjust your spending and withdrawals when the market is down and your investments have lost value.

For example, the fewer shares of stock you have to liquidate to generate income, the more shares you get to keep in your portfolio. That way, those shares can benefit from an eventual market recovery.

Aim to build flexibility into your budget so you can reduce spending as needed. And if you can handle it physically, be open to work. A part-time job could help you maintain your desired lifestyle during a down market without compromising your long-term savings.

3. Maintain a strong cash cushion

Another great way to get through a market decline? Have enough cash to pay your living costs for a period of time without having to sell a single asset at a loss.

A large-enough cash cushion could make this possible, so aim to have anywhere from one to three years' worth of living costs in cash at all times. You could even boost your cash reserves beyond the top end of that range for added protection.

Just don't go overboard. While you can earn a decent interest rate on cash today, that's not the norm. Plus, interest is taxed as ordinary income, so it's not the most efficient way to generate returns on your money. As such, you should limit your cash pile to a reasonable sum.

After spending decades consistently funding an IRA or 401(k), the last thing you want is to risk having that money run out in your lifetime. With the right plan, you can avoid that fate and gain peace of mind so you can enjoy the savings you worked so hard to build.

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