Key Points
Running out of money in retirement is a huge fear.
Being flexible with withdrawals during market downturns could be the ticket to making your savings last.
Maintaining a cash buffer could also come to the rescue.
- The $23,760 Social Security bonus most retirees completely overlook ›
In the course of planning for retirement, you might create an estimate of your annual spending needs and set a savings goal to meet. But the real challenge starts when you actually begin tapping your IRA or 401(k) for money.
If you're not careful with withdrawals, you could risk running out of money at some point during retirement. That's a scary thing, and it's a very real possibility -- even if you have a multi-million-dollar balance in your IRA or 401(k) plan to start out with.
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The good news? With the right strategy, you can stretch your retirement savings and give that money more staying power. Here are two crucial things to do to avoid running out.
1. Be flexible with retirement plan withdrawals
You'll generally hear that it's important to have a withdrawal strategy for your retirement savings, as opposed to taking random distributions without a plan. To that end, you may choose to follow the 4% rule, since financial experts have long stood behind it. Or, you may decide on another withdrawal rate based on your specific asset mix and income needs.
A lot of people assume that once they establish a withdrawal rate for their savings, they should stick to it for all of retirement. But that approach puts your nest egg at risk of getting depleted prematurely.
It's fine to stick to your established withdrawal rate when the market cooperates. When the market is down, it's important to be flexible with withdrawals. That means being ready to adjust your spending downward so you can take less money out of your savings.
Let's say you'd normally take $60,000 a year out of your IRA. If the market falls 20% and you stick to that plan, you're going to have to sell more assets to get your $60,000. And once those assets are sold off, they can't regain lost value.
But let's say you're able to reduce your retirement plan withdrawals to $45,000 a year during market downturns. Suddenly, you're giving an extra $15,000 in assets time to recover and grow. Do that repeatedly, and it could make an enormous difference over time.
2. Maintain a cash cushion
Another way to lower the chance of your savings running out? Hoard some cash during retirement so you don't have to touch your portfolio at all when the market isn't cooperating.
Going back to our example, let's say you'd normally need $60,000 a year in withdrawals to keep up with your expenses. If you have $120,000 sitting in cash, that gives you two full years to maintain your lifestyle. That means you don't automatically have to reduce spending and you can leave your investments untapped.
Is your portfolio guaranteed to regain all of its lost value in a two-year period? Not necessarily. But many market downturns are fairly short-lived. So depending on the situation at hand, having a large enough cash cushion could spare you from losses completely. And even if that doesn't happen, a strong cash buffer could minimize the pain.
If, in this situation, it takes the market three years to recover, you may deplete your cash reserves after two years if you don't reduce spending. But in that case, you're taking $60,000 total out of your portfolio while it's down -- not $180,000. That's huge.
Running out of money is a lot of retirees' worst fears. And unfortunately, having a larger nest egg doesn't make you immune to that risk. But if you take a flexible approach to spending and withdrawals while stockpiling some cash for a prolonged market downturn, you can put yourself in a much stronger position to not outlive your savings.
The $23,760 Social Security bonus most retirees completely overlook
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