How Long Will My Money Last in Retirement?

Shawn Plummer

CEO, The Annuity Expert

The challenge many of us will face as we retire is how do we make sure our money lasts as long as possible? This retirement planning guide is ideal for pre-retirees between the ages of 55-65, which will offer advice on:

This guide will also answer the following questions:

  • Will I run out of money in retirement?
  • How can I maintain my lifestyle?
  • What happens if my health declines?
  • How long will my 401k last?

This retirement plan is ideal for:

If you are far from retiring (Ages 30-54), follow this step-by-step guide to take guarantee your future retirement, starting today.

How To Prepare Financially Nearing Retirement

How will I pay for day-to-day essentials when I retire?

When your regular paycheck ends, you still need to pay for housing, food, and healthcare. Preparing to manage these everyday expenses is an important part of planning for retirement, but you underestimate how much these things will cost if you’re like most people.

Take healthcare, for instance; Medicare is not free. The more coverage you want, the more you will likely pay, but there is also this fact, people are living longer, and that could mean paying for more health problems as you age.

How will you afford it all?

Lining up several income sources before you retire can put you in a better position to take care of necessary expenses and unforeseen circumstances during retirement. For example, combining social security, a pension, drawing down assets, and an annuity may be the right approach.

The Financial Transition Into Retirement

Today, retirement looks very different. One of the most significant changes is that we have a higher life expectancy, and living longer means a longer retirement.

As you transition from your career into retirement, you’ll likely experience a change in income too. So, before that first day of retirement arrives, you’ll need to plan for a change in your spending, saving, and investing habits.

In other words, you’ll need to prepare for your needs as well. A reliable source of income to pay for the basics, such as food, mortgage, utilities, healthcare, and, of course, taxes.

A dependable stream of income can fill in gaps during retirement and protect you from stock market ups and downs, interest rate shocks, and other challenges to financial security.

Things To Consider For Your Retirement Income

Life Expectancy

Life expectancy is defined as the average number of years of life remaining for a group of people at any given age. To understand just how this impacts our retirement, let’s look at both males and females.

Male Longevity

Back in the 1950s, the average length of retirement for 65-year-old men was eight years. That’s it.

Today at age 65, a man’s life expectancy is 83. Meaning that he needs to figure out how to make his money last 18 more years if he retires today.

Female Longevity

A female’s life expectancy is age 86. That’s 21 years of retirement, but that’s only living to the average life expectancy. What if you live longer?

Living longer than average life expectancy can magnify the impact of inflation, market volatility, and long-term care needs.

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Inflation

One of the most significant factors to consider when preparing for retirement is inflation. If not crafted appropriately, the long-term effect could potentially require a retiree to modify their lifestyle in their later years to avoid running out of money.

The average inflation rate over the past 30 years is 3.22%.

Groceries Example

Let’s say inflation is a constant 3% during retirement.

Today, you spend $100 on groceries, but at life expectancy age, your grocery cost will have more than doubled to $222.13.

By age 94, the grocery bill would now be $257.51. That’s two and a half times what the cost was when you retired. If the retirement income doesn’t increase over time, you would quickly find yourself looking for ways to cut your grocery spending.

Social Security – Cost of Living Adjustments (COLA)

Over the past 30 years, the average COLA increase in Social Security Benefits has been 2.39%.

Healthcare out-of-pocket costs have increased by 4.8% within the same 30 years.

With a 3.22% average inflation, utilizing Social Security Income alone to keep up with inflation is a road to downsizing your lifestyle in later years. With a 70% chance of utilizing Long-Term Care in the future, increasing your cash flow over time is essential.

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Healthcare

When planning your retirement, there’s a lot to think about, from how much you need to save, when you should start taking social security, and what you will do with all your free time. Yet all too often, retirees are surprised by one significant expense they did not account for, healthcare.

Today we know that healthcare can be a major expense for retirees. In fact, the three largest expenses you will face in retirement are housing, transportation, and healthcare, so making sure you have planned for it is important.

Why does it catch so many off guard?

For starters, many assume that Medicare will cover all their healthcare costs. And while Medicare does provide for health care coverage in retirement, it does not cover everything.

Premiums, deductibles, copays, co-insurance are just some of the costs you will be responsible for.

Furthermore, if you want coverage for prescription drugs, vision and dental services, you will be required to purchase additional coverage.

And don’t forget Medicare doesn’t cover it stays longer than 90 days in a skilled nursing facility.

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So how much can you expect to spend on healthcare?

The amount you spend on healthcare will generally increase as you age.

  • Today, a healthy 65-year-old couple will spend about $12,052 a year in out-of-pocket healthcare expenses.
  • At 75, that will increase to $21,706.
  • And by age 85, it will jump $37,839, which is over three times what they spend at age 65.

Why a jump?

Retirement Health Stages

Phase #1

The first phase is you are living life to the fullest. You’re traveling, playing golf, spending time with your family and friends, doing all the things you look forward to doing in retirement. During this phase, you tend to be healthy and living independently.

Phase #2

As you age, you will enter the second phase of retirement. However, you still might be able to do all of the things you were doing before, and now it takes a little more energy to do them.

Driving might become a little more difficult, and you are moving a little slower. Those aches and pains start to act up a little more, requiring a few more doctor visits than before.

Phase #3

Finally, in the third phase, you may no longer be able to live independently. Things such as cleaning your house and grocery shopping may require you to hire someone to help or need support from a nurse or family member.

During this phase, healthcare costs really go up, and you need products and strategies to help you plan for these costs, such as long-term care insurance products, commonly referred to as linked benefit products.

Long-Term Care Insurance Through Life Insurance and Annuities

These products combine life insurance with long-term care benefits, allowing you to access benefits to pay for services such as skilled nursing, in-home care, and medical services. Additionally, other insurance products such as a fixed index annuity can increase the income you receive, should you no longer care for yourself.

Medigap

Then there are Medigap policies that can cover some of the expenses that Medicare does not.

Growing Your Savings in Retirement

How do I grow my assets while still taking income, and how can I protect what I’ve earned?

These are questions you may be thinking about when you’re nearing or entering retirement. But, of course, when you’re ready to retire, you’ll need a source of income that allows you to embrace your new lifestyle fully.

Whatever your ideal retirement looks like, you’ll need to examine how you may be able to grow and protect your assets. Some of these approaches you’ve likely heard of, and others may be completely new.

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Certificate of Deposit

A CD is a traditional savings account that earns interest over time. They’re usually kept for a finite period and may have penalties for early withdrawal. When CD rates are low, this type of solution protects your money but may not allow for enough growth.

Stocks and Bonds

You can also invest in traditional stocks and bonds. Putting your money in the market may come with risks and less protection than CDs but can provide the potential for greater growth.

Annuity

Annuities are insurance contracts that let your money grow, or you take income from it. Some annuities even allow you to let your money grow while also receiving that guaranteed lifetime income you need in retirement.

Deferring Taxes

Any income, including investment income, is taxed, and those taxes can reduce your retirement assets. An annuity allows you to defer taxes while your money is growing and is taxed when you start taking income. Annuities can be a powerful addition to your financial plan when you want to protect and grow income in retirement.

Spending Your Retirement Savings

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Recovering Stock Market Corrections

Timing is everything. Markets have gone up and down for as long as we can remember. And when you are saving for retirement, stock market corrections, while at times worrisome, may not be as consequential.

Why?

Because you have time on your side for the markets to recover before you need to rely on your nest egg, this is called the sequence of return risk.

However, when you take withdrawals from those accounts during retirement, market corrections can significantly impact those same assets’ long-term ability to generate income for as long as you live. And if those stock market corrections take place early in retirement, the risk of outliving your savings can be magnified.

But there are strategies that you can use to help minimize the potential impact that sequence of returns can have on your retirement.

One option is through the use of a Fixed Index Annuity. These long-term retirement income vehicles offer tax-deferred growth potential and have options based on when income is needed or how early you start planning for retirement income.

The 4% Retirement Rule Doesn’t Work.

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One rule of thumb is usually the basis from which all others are built, the 4% safe withdrawal rate.

In 1994, William Bengen conducted a study to determine how much retirees could withdraw from their retirement nest egg without running out of money. This study is known as The 4 Percent Rule or The Bengen Rule.

In his research, he discovered that if retirees withdrew 4% of their retirement savings each year, adjusting each year for inflation, there was a good chance that retirees could not outlive their retirement nest egg.

Today, however, researchers are beginning to rethink Bengen’s 1994 research.

Many researchers believe that withdrawing 4% of portfolio income isn’t safe, but instead is 2.8% or 2%, or even as low as 1.49%.

Why?

Bonds.

Low Bond Yields

Simply put, Bengen’s research assumes that your retirement portfolio was invested in stocks and bonds, and Bengen’s assumptions did not consider today’s long period of historically low bond yields.

The low yields drag down the potential performance of the bond portion of your portfolio lower than what Bengen assumed. And before you think that simply reducing your bond holdings will be the answer, increasing your exposure to stocks will increase your exposure to volatility, which adds a whole new level of risk to your retirement.

Correcting The Bengen Rule

The key is that you may need to consider retirement products that you may not have contemplated when you were saving for retirement to address the many retirement risks. Annuities are just one of these types of products that are specifically designed to help generate retirement income. But, again, your financial professional can help you determine if a fixed index annuity is right for you.

How To Maintain Your Retirement Lifestyle

If you aren’t familiar with fixed index annuities, an FIA is designed to meet long-term needs for retirement income. Some of the benefits include

  • Protection from stock market losses.
  • Defer taxes to grow savings faster.
  • The potential to earn interest based on positive changes in an external stock market index.
  • Benefits to help pay for healthcare costs.
  • A death benefit to help her leave a legacy.
  • A guaranteed income for life.

Now, compared to an approach that uses a retirement account (IRA, 401k) only, an FIA may offer less control, liquidity, and flexibility of assets for a period of time. FIAs have a surrender charge and a market value adjustment if they are surrendered too early.

Also, this may have less growth potential than a sole retirement plan has. Certain factors like caps spreads, and participation rates will limit the amount of indexed interest credited.

Regardless, annuities can help you grow your assets. Still, even better, an annuity can provide you with income that’s guaranteed to last as long as you live, no matter what the interest rate is or what the market does.

How Annuities May Protect Your Retirement Income

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At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

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Frequently Asked Questions

These are commonly asked Americans questions about when they can retire and if they have enough savings to retire.

Can I retire at 60 with $500k?

A person can retire at age 60 with a savings of $500,000.00. If the person is currently age 60 wanting to retire immediately, they could earn $25,000.00 a year for the rest of their life. If the person is age 50 wanting to retire at age 60, they could earn $46,423.00 a year for the rest of their life. If a person is age 40 wanting to retire at age 60, they could earn $51,280.00 a year for the rest of their life. Starting at age 62, the retiree is eligible for Social Security Benefits generating more income in retirement.

Can I retire at 60 with 1 million dollars?

A person can retire at age 60 with a savings of $1,000,000.00. If the person is currently age 60 wanting to retire immediately, they could earn $50,000.00 a year for the rest of their life. If the person is age 50 wanting to retire at age 60, they could earn $92,846.00 a year for the rest of their life. If a person is age 40 wanting to retire at age 60, they could earn $102,560.00 a year for the rest of their life. Starting at age 62, the retiree is eligible for Social Security Benefits generating more income in retirement.

Can I retire at 55?

A person can retire at age 55 with their own savings. For retirees younger than 59 and a half, any income generated from a qualified retirement plan such as a 401(k) or IRA will pay a 10% early withdrawal penalty in addition to ordinary income taxes. Starting at age 62, the retiree is eligible for Social Security Benefits generating more income in retirement.

Can I retire with 1 million dollars at 55?

A person can retire at age 55 with a savings of $1,000,000.00. If the person is currently age 55 wanting to retire immediately, they could earn $46,500.00 a year for the rest of their life. If the person is age 45 wanting to retire at age 55, they could earn $80,169.00 a year for the rest of their life. If a person is age 40 wanting to retire at age 55, they could earn $80,169.00 a year for the rest of their life. Starting at age 62, the retiree is eligible for Social Security Benefits generating more income in retirement.

When can I retire if I was:

  • Born in 1955: Full retirement age began in 2017.
  • Born in 1960: Full retirement age begins in 2022.
  • Born in 1962: Full retirement age begins in 2024.
  • Born in 1963: Full retirement age begins in 2025.
  • Born in 1970: Full retirement age begins in 2032.

Is 2 million enough to retire?

A person can retire with $2,000,000.00 saved. At age 60, a person can retire on 2 million dollars generating $100,000.00 a year for the rest of their life starting immediately. At age 65, a person can retire on 2 million dollars generating $113,300.00 a year for the rest of their life starting immediately. At age 70, a person can retire on 2 million dollars generating $123,200.00 a year for the rest of their life starting immediately.

Can I retire with 3 million dollars?

A person can retire with $3,000,000.00 saved. At age 60, a person can retire on 3 million dollars generating $150,000.00 a year for the rest of their life starting immediately. At age 65, a person can retire on 3 million dollars generating $169,950.00 a year for the rest of their life starting immediately. At age 70, a person can retire on 3 million dollars generating $184,800.00 a year for the rest of their life starting immediately.

Can I retire with 10 million dollars?

A person can retire with $10,000,000.00 saved. At age 60, a person can retire on 10 million dollars generating $500,000.00 a year for the rest of their life starting immediately. At age 65, a person can retire on 10 million dollars generating $566,500.00 a year for the rest of their life starting immediately. At age 70, a person can retire on 10 million dollars generating $604,800.00 a year for the rest of their life starting immediately.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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