MW How to make sure you don't run out of money in retirement

By Paul A. Merriman

Sufficient savings and the right withdrawal strategy are crucial

Am I in danger of running out of money?

Without a doubt, this is one of the trickiest questions facing people who are about to retire.

In this article I'll help you think about this question. We'll look at a few simple rules of thumb, and I'll tell you how to find what's likely to be the best answer for your own situation.

This is part of a series of articles I think of as Boot Camp for Investors 2025.

We've covered the long-term benefits of investing in stocks instead of bonds, the big difference that even small changes in your portfolio can make, how to control your level of risk as an investor, and how to turn relatively modest regular savings into a sizable retirement nest egg.

However, for one reason or another many people find they need to retire before they can fully carry out their retirement plan. If you are - or might be - among them, then this discussion is for you.

When it's time to start withdrawing from your savings, you need a plan that balances two important variables. Fortunately, both these variables are under your control:

-- How much you'll take out each year

-- How your portfolio is invested

How much?

Financial advisers often recommend taking out 3% to 5% of your portfolio's value every year, adjusting as the value of your portfolio goes up and down.

Read: The guy behind retirement's 4% rule now thinks that's way too low. Here's how much more money you could spend.

Based on history, if you can meet your needs with 3% withdrawals, you're highly unlikely to ever run out of money. That same history suggests that a 4% withdrawal rate probably will be sustainable - and even a 5% rate might work out.

However, if you don't have sufficient savings to give you that flexibility, that's a different story.

Your cost of living isn't necessarily going to go down just because the stock market has a few awful years.

In the past, I have addressed this topic by referring to a table of numbers based on actual market returns starting in 1970. Depending on how you allocated your portfolio, the numbers show that you would not have been in danger of running out of money for at least 20 years with a first-year withdrawal of 5%, adjusted each year for inflation.

I could flood you with numbers, but I think your time is better spent thinking about some very important variables.

For one thing, how long will you live? Many people underestimate their life expectancy. If you're hoping to use up your assets by the time you die, and you live longer than you planned, what then?

Read: Don't count on an inheritance: Baby boomers are hanging on to their money

What if you really must reduce your spending on things you regard as basic needs? Can you make a fallback plan that would be acceptable?

How to invest?

The numbers for a hypothetical retirement starting in 1970 show two things very clearly.

First, if you started by taking out 4% and adjusted for inflation every year after that, even an extremely conservative portfolio invested 90% in government bonds and 10% in the S&P 500 SPX would have had no trouble keeping you going for 40 or more years of retirement. (That's not surprising given the high interest rates on bonds during the 1970s.)

Second, if you invested just 15% each in the S&P 500 and small-cap value stocks, you could have had a very conservative portfolio with 70% in bond funds. That would have let you take out 5% per year instead of 4%. And the portfolio would have held up just fine for at least 40 years of retirement.

I think that's pretty good news. Small-cap value stocks are considered riskier than the S&P 500. But having 70% in government bonds is certainly conservative. So that could be a recipe for having what you need along with ample peace of mind.

The higher returns from small-cap value stocks (making up as little as 15% of your portfolio) would have given you considerably more money to spend. Even better for cautious investors, that additional asset class lets you dial down your risk (and dial up your peace of mind) by limiting the stock side of your portfolio to as low as 30%.

If you've followed all this (and it's fine if you need to go through it again), you can see the value of starting with a basic plan and then tweaking it until you find a combination that seems right.

Putting these variables together can seem like a daunting task. But if you have a do-it-yourself mentality, you don't need to hire a financial adviser to manage your money (and charge you, year after year, some percentage of your assets for doing so).

Instead, I recommend you do your best to grapple with questions like these:

-- How much do I really need from my portfolio to feel I have an acceptable life as a retiree?

-- Am I willing to stretch my comfort level and diversify beyond the S&P 500?

-- How long do I expect to live after retirement?

-- Is there some way I can supplement my income after I retire?

Then hire a fee-only adviser for a few hours to double-check your thinking and make sure you haven't overlooked something important. This is akin to getting a second opinion before you commit to a medical course of action.

You're likely to wind up with a good plan. And if your adviser gives you confidence, it could be well worth your while to check back in with the same person from time to time to see if you need to make a course correction.

Finally, here are three key points to keep in mind:

-- Nothing is guaranteed. Luck plays a bigger role than we like to think. Investors who retired in 1980 or 1990 had luck on their side, but luck was against those who retired in 2000. You can control some things, but not the future.

-- Whatever the size of your portfolio, consider diversifying your equities beyond the S&P 500.

-- No matter how much or how little money you have available to spend, your retirement will be less stressful if you live a bit below your means. To the extent that you can, build up a cushion of cash to deal with the unexpected needs and opportunities that are sure to arise.

For more on this topic, check out my latest video or my podcast.

In more than half a century of helping investors, I've concluded that the single best thing you can do is begin your retirement with more than "just enough."

In the next Boot Camp article, I'll show you how that can greatly increase your retirement spending power - and your peace of mind.

Richard Buck contributed.

Paul Merriman and Richard Buck are the authors of "We're Talking Millions! 12 Simple Ways to Supercharge Your Retirement."

-Paul A. Merriman

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June 04, 2025 17:00 ET (21:00 GMT)

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