It’s no wonder most people have a fear of outliving retirement savings.
This article addresses why people fear outliving retirement savings, and what can be done to reduce this common fear that plagues most soon to be retirees.
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Why People Fear Outliving Retirement Savings
The scariest thing about retirement is of course the discontinuation of income.
For many, there’s also accompanying fear about getting older. Fear of an inability to earn accompanies getting older.
In addition to aging concerns and the loss of steady income, there’s enormous uncertainty about how long retirement savings will last.
This is due to the fact that retirement planning is based on 3 estimates:
- Life longevity
- How much investment returns will be
- The rate of inflation during retirement
5 Ways to Lower the Risk of Outliving Retirement Savings
In light of the fact that retirement plans are based on estimates, here are 5 things you can do to reduce the fear of outliving retirement savings other than the obvious and common suggestion of saving more and spending less (as if cutting out lattes at 55 will meaningfully change your financial future).
1. Improve Investment Returns
Investment returns are one of the biggest factors as to whether a retiree will outlive retirement savings or whether savings will last a lifetime.
How can we improve investment returns? By doing any or all of the following:
- Pay more attention to the returns you’re earning
- Lower investment fees
- Set investment return goals and actively making an effort to achieve them
- Keep your assets organized in one document or app.
- Become a better investor
How to Become a Better Investor
The first four suggestions above are easy to figure out and the fifth may seem like a “duh”.
So let’s expand more on becoming a better investor as a way to improve investment returns.
Investing is a skill; when we learn more about something we can improve our skills.
I’ll confess that I love and regularly enjoy watching movies, documentaries, and Shark Tank before sharing this next statistic with you:
The average American spends over 85 hours a month watching TV — almost 100 times as much time as they spend on their household finances.
Nowadays, I really don’t spend that much time actually investing, but I did spend decades learning about investing (which is what drove me to start Retire Certain).
What I found is once you truly understand investing, actually investing doesn’t take much time.
But even learning about investing isn’t the monumental task it’s usually perceived as being.
Learning about investing might take 20 hours of study.
That’s 4 hours a week for 5 weeks for something that will literally change your life and give you peace of mind so it’s kind of crazy not to become a very knowledgeable investor.
My point with this spill is to become a better investor by learning more about investing.
What else can be done to reduce fear of outliving retirement savings?
2. Create a Retirement Plan and Live From That Plan
Creating a financial plan with the end goal of growing retirement savings to the needed level will go a long way in reducing the fear of outliving retirement savings.
That’s because the plan itself is based on how much money you’ll need to live in retirement.
Having such a retirement plan applies to the time leading up to retirement and the time in retirement.
Yet Northwestern Mutual’s 2019 Panning and Progress Study found that 92% of Americans age 18 and over agreed with the statement “Nothing makes me happier or more confident in life than feeling like my finances are in order” but 48% of people also said they were unclear on how much they can afford to spend now vs. how much they should be saving for later.
A financial plan that builds retirement savings will help clarify “how much they should be saving“, the exact thing about which people said they were unclear.
There are even more reasons to have a financial plan besides getting control of your investments.
Plans help us estimate how much is needed to retire.
Plans help us avoid emotional investing.
And plans excite us because they show us what’s possible.
Even though plans are based on estimates as addressed earlier, creating a wealth plan is priceless, and here’s why:
It forces us to define what we want and determine the steps we’ll take to have enough retirement savings to support our desires.
A plan serves as a roadmap toward our financial goals.
I don’t know if it’s some kind of universal power or that our attention gets directed when implementing plans, but I’ve noticed things start happening that lead us to accomplish our goals when we have a plan that defines our goals and clarifies how we’ll reach them.
Let’s look at the next way to mitigate the fear of outliving retirement savings.
3. Tweak Your Retirement Plan
Change triggers uncertainty which triggers fear.
You’ll want to tweak your plan based on life changes as well as changing opportunities.
Things can happen in a day that can permanently change your life.
Plus, as you live, you discover more about what you want.
Plans must be adapted for this.
I get that widely popular passive investing follows a fixed asset allocation model regardless of what’s happening in the financial markets or the economy, but let’s consider the logic of this.
Does it make sense to allocate as much money to highly overvalued assets instead of undervalued assets while adhering to an asset allocation model??
Does it make sense to buy bonds when interest rates are at all time lows near the end of a 40 year cycle, or vice versa?
It doesn’t make sense to me, and it never really did even though this is what is commonly taught and accepted as fact.
Advanced investors consider the financial markets and economic environments when investing rather than relying 100% on fixed asset allocation.
The next idea goes a long way toward overcoming fear of outliving retirement savings speaking from experience.
4. Establish at least 1 income source before heading into retirement
Having an extra income stream can have a huge impact on the amount you need to save for retirement.
This allows you to depend less on retirement withdrawals which are particularly problematic during bear markets.
Sequence of returns risk shows that retirees can outlive retirement savings if their investments lose money in the years just before or after retirement, especially during higher than normal inflation.
The equation below demonstrates the impact an additional income stream can have on how much money you need to retire.
I call this the NICE equation, for the New Income to Capital Equation. Here it is:
If someone makes just $1700 a month in extra income, it’s like they’ve saved another half a million dollars when compared to retirement withdrawals of 4%.
While many people feel like they don’t want to do any sort of work in retirement, the fact is that many people get bored in retirement.
I read an article recently about ways to combat boredom in retirement. The suggestions were things like getting a dog and making lists. (Seriously:)
Why not have on that list of ways to combat boredom to make more money from either increasing your investment returns or creating a new income stream?
There’s one more idea to reduce the fear of running out of money in retirement.
5. Copy What the Wealthy Are Doing
Forget just following the crowd. Instead, observe what people with plenty of money are doing and copy them to build up and retain retirement savings accounts.
Millions of people admire Dave Ramsey as a financial mentor, for example.
What’s Dave doing at age 61 with a reported $200 net worth?
Dave is building his business like he’s done for decades. My guess is that Dave has enough money to retire.
But he didn’t get wealthy by following his own investment advice. He got wealthy by sharing what he had learned about debt reduction, and building a small business sharing those lessons, first in churches, and then elsewhere.
In your own circle or community, how did wealthy people get wealthy?
What are people doing to make money outside your community? There has never been a better time to observe what’s working, and to learn from others so you can emulate them.
There are hundreds of ways to improve investing skills as well as to become a better investor.
I’d like you to ask one question before ending this post…
Is Fear of Outliving Retirement Savings Even Logical?
Behavioral finance is a real field, and for a good reason. Investors are often their own worst enemies so don’t leave this post without addressing this reality. Studies show investors are wrong most of the time.
Let’s address a yes or no answer to this question to put your fears of running out of retirement savings to rest, or prompt you to act (so you can still ease your fears of running out of money after you retire.)
No; It’s Illogical to Assume You Won’t Outlive Retirement Savings
If you fear outliving retirement savings, but math and logic show you should have plenty of money, focus on your mindset so you can be at peace with where you are from a financial perspective.
If you’ve seen it’s illogical to worry you’ll outlive retirement savings, ask these simple questions.
Explore the answers to help accomplish this mindset shift:
- What life experiences have influenced your financial beliefs?
- Are you hanging into past investing mistakes?
- What were the prevailing beliefs about money in your childhood home?
Then let go of limiting beliefs you took on from someone else or from the past.
Yes; It’s Logical to Assume You Will Outlive Retirement Savings
In this case, there’s a good chance your fear of outliving savings is perfectly valid and signaling you to catch up retirement savings or improve your personal finances.
If math and logic show you most likely will outlive your savings, focus on both investing and income generation to improve your ability to confidently retire and ease your stress.
There’s no shame in this; the overwhelming majority of people don’t have enough retirement savings.
Fortunately, there are many alternative retirement strategies available now that simply weren’t available to previous generations.
There’s nothing like implementing solutions to overcome what might be a very valid fear to remedy them.
Fear of Outliving Savings Summary
Now you have 5 potential ways to lower the risks of outliving retirement savings and a simple question that can tame your fears.
Prefer video? Watch my video about fear of retirement.