The Real Reasons You Risk Running Out of Money in Retirement

If you're retiring with a generous IRA or 401(k) balance, chances are that money didn't just materialize out of nowhere. Rather, you probably lived well below your means for many years, contributed to a retirement account regularly, and invested carefully to build up a comfortable nest egg.

After making that effort, the last thing you want is for that money to run out on you during retirement. And if you were a disciplined saver for many years, you'll probably end up being a disciplined spender once you've stopped working.

Image source: Getty Images.

But overspending isn't the main reason you could risk running out of funds in your IRA or 401(k). Here are some other factors that could put your retirement savings at risk.

1. Being too conservative with your investments

In the course of building a nest egg, it's wise to invest heavily in stocks. In retirement, it's important to shift away from stocks to some degree to reduce your risk. But that doesn't mean you should get rid of stocks in your portfolio completely.

It's crucial to have a portion of your portfolio in stocks so your money continues to grow in retirement. The exact percentage can hinge on your income needs and risk tolerance. But as a general guideline, going below 40% could stall your portfolio and make it harder for your investments to keep up with inflation.

If you're worried about holding stocks in retirement, diversifying could help mitigate your risk. You can load up on stocks across a range of market sectors or invest in S&P 500 exchange-traded funds (ETFs) for broad market exposure.

2. Not having a safety net during market downturns

If the stock market crashes while you're in the process of building retirement savings, it can be nerve-wracking, but it's not necessarily a catastrophic event. If you're not touching your money for many years, you have time to wait out a recovery.

But a stock market crash can be much more detrimental during retirement. At that point, you may be living off your portfolio. That's why it's important to have a plan in case the market tanks and your investments take time to regain lost value.

That backup plan can actually be pretty simple -- have a decent cash cushion. If you keep about two to three years' worth of living costs in cash, you'll have a way to pay your expenses without having to lock in portfolio losses.

Another thing you may want to do in a market crash situation is reduce spending temporarily. The less you need to tap your portfolio, the greater the chances of it recovering.

3. Lacking a clear withdrawal strategy

Many people plan for retirement with a savings goal in mind. But once you reach that goal, it's important to manage your nest egg wisely. That means having an actual withdrawal strategy.

The popular 4% rule is often used as a starting point for managing a retirement nest egg. But it's far from a one-size-fits-all solution. Your ideal withdrawal rate depends on factors like your life expectancy, market conditions, spending needs, and other income sources, like Social Security.

You may also want to take a more flexible approach to withdrawals. Rather than decide, for example, that you'll withdraw 3.6% a year every year, you can base your distributions at least partially on market performance.

If it's a strong year, you can raise your withdrawal rate to 4.2%. If it's a weak market, you may want to stay just under 3% if possible. Having a strategy could be your ticket to preserving your savings, especially if you end up living longer than expected.

Running out of money in retirement is a scary thing. But even if you stick to a budget and don't go overboard on spending, it's a real risk due to the factors above. That's why it's important to not ditch stocks completely, build a cash cushion for protection during market downturns, and have a withdrawal strategy that's specific to you.

The Motley Fool has a disclosure policy.