Do you live with an ongoing but subtle fear that you’ll run out of money? And does that fear get louder with each passing year?
In this post, I’ll share how to not outlive your money. Taking action on the right steps for where you are right now will help calm your fears.
Don’t Assume 10% Annual Return on Stocks
A long time ago my boss told me to remember the first three letters in assuming before assuming anything. Most people assume that stock investing is the best way to not outlive your money.
Some of my financial coaching clients assume that there is a sort of magic in stock market investing. There is no magic involved with making more money, saving money, and investing in stocks for two to three decades to build a retirement account.
But guess what? Not everyone has the benefit of two to three decades to save and invest. And not everyone wants to take the traditional slow and steady path that often leaves you without enough money for the rest of your life to live how you want.
Mainstream finance certainly teaches that investing in the stock market long term is the answer to not outliving your money. There’s no doubt that this strategy can build wealth over time, just don’t assume that this strategy will achieve the level of wealth that you want.
The scary reality is that the further in time we move from the last bear market, the more investors expect the long term average annual returns from stocks of around 10% for life. Comments on my YouTube channel from uninformed investors actually argue this point with me, along with thinking that the often quoted total return 10% is income.
Don’t assume a 10% annual average total return just because it has been the long term average total return over certain time frames in the past.
Rather than assuming a 10% stock market return, here are two steps for a more realistic look at what you can reasonably expect to earn from stocks prior to and during retirement. If you’re banking on stocks to ensure that you don’t outlive your money, you’ll want to do this.
First, if you’re investing for a twenty year time horizon before needing your money, review the best and worst long term averages for other twenty year time frames. If you’re investing with a five year time frame before retiring, look at the best and worst time frames for five years.
The wealth building results from this approach can be very different, and much more realistic.
Second, consider what is happening at the time you are investing into the stock market, or the time you are assessing your wealth plan. Simply see if stocks are overvalued or undervalued relative to history.
Here’s why this is so important: Overvaluations are generally followed by long periods of less than average returns. Undervalued markets are generally followed by years of above average performance.
This investing reality is counter intuitive. For this reason, it trips up many well laid wealth plans.
The Real Numbers for Stock Market Returns
The long term total annual return from the broad stock market varies from year to year since the stock market is constantly changing. Let’s look at real numbers from the past that are little publicized.
For the ten years ending February 2009, the average annual S&P 500 return was -3%. (1)
For the ten years between March 1999 and February 2009, the average annual return for the S&P 500 index was -3.43%. After factoring in the effect of inflation (CPI Adjusted), this negative return dropped to -5.9%!
In fact, the ten year return was negative for each 10 year period ending November 2008 through October 2010. The rolling back ten year return was below 5% until June of 2012. (2.)
What if you were just entering retirement after one of these low return ten year periods that left the value of your wealth plan inadequate? Would your money still outlive you?
Importantly, let’s also consider the upside. On the other hand, the best ten year return of 20% ended in August 2000. (1)
For comparison, the 10 year return on the S&P 500 index fund through August 2018 was over 10%.
We’ve all heard repeatedly that you cannot guess the direction of the stock market. While there is some truth to this, everyone can look at the CAPE PE ratio or other signs that signal overvalued markets.
And by considering this data, you can influence the probability of you not outliving your money.
This isn’t about living in fear, which outright sabotages wealth building. This is about being realistic.
These are real numbers based on stock market performance. And many people think the stock market will deliver a 10% return every year.
Don’t Confuse Income with Appreciation
Many people think the long term total return from the stock market of around 10% provides income of 10%. Total return is the return with dividends reinvested and compounded for years.
Not only this, but the dividend yield as of this writing is around 1.8% for the broad stock market, a typical rate. This is a far cry from 10%.
But if you’re aiming for the 10% total return average from stock market investing, you won’t be living off dividends anyway. This is because the dividends will be need to stay in your investment account and be reinvested and compounded to achieve that 10% average annual total return.
Create Multiple Income Streams
Conventional finance focuses on dividend income, withdrawing money from investments, and social security to pay bills in retirement. These income sources can be an important element of retirement income.
But this isn’t necessarily a great plan to making sure you don’t outlive your money and here are several reasons why.
-You may live longer than expected.
-Dividends yields are low.
–Retirement savings withdrawals to live on feels bad unless you’re very wealthy.
-The stock market could have a big bad bear market just before or shortly after you retire
The ideal solution, then, is to create alternative income streams ahead of retirement that are not highly dependent on the movements of the stock market.
The ways to create multiple income streams are many. They include consulting, online business, real estate rentals, REIT investing, or investing in MLPs, to name a few. (This eBook has our Top 9 Wealth Building + Income Generating Strategies.)
The less debt you have the easier it is to have extra money every month. Instead of paying for the use of money, work toward others paying you for the use of your money. This could take the form of private lending, or even bonds. (Note that the value of long term bonds go down when interest rates go up.)
Prioritize Lifestyle Expenses
When I have worked with financial coaching clients, we often find that they were paying for things that were not important. Alternatively, they couldn’t purchase the things they did really want because they were spending money on the things they didn’t really care about.
This can apply to present expenses as well as future expenses. For example, is it more important to spend the extra $100,000 on a house now, or use that money years later, after compounding, to live how you want.
Prioritizing your lifestyle spending allows you to live the way you want, with the experiences and things that you want. It also leads to not outliving your money through conscious and smarter spending.
The older I get, the more I see that I enjoy experiences over things which create clutter and end up traveling to Goodwill in the back of my SUV. Even better, I’ve seen that the things I really love often cost nothing.
What’s the price of reading a great book outside on a beautiful day, or walking a peaceful hiking trail. These are free experiences I enjoy, often daily.
What’s important to you that you’re spending money on? What’s not important that you’re spending money on? Open up your credit card account now and take a quick browse through those expenses.
Assume Inflation Will Deplete the Value of Your Money
You know how the movie used to cost $1 and now a movie cost $8? That is due to inflation.
Inflation is the norm based on history. Simply put, inflation depletes the value of your money every year, on average, by about 3%. This means you can buy less with the same amount of money.
Consider inflation in your plan to not outlive your money. It’s important. Many calculators factor inflation into their projections.
Have a Wealth Plan
It’s so easy for the busyness of life to keep us from planning. Create a wealth plan with the following:
-Current net worth
-Estimated future value of your wealth
-When you want to retire
-The amount of income you want for retirement
-The amount of income you can generate from the estimated future value of your investments
The sooner you plan to more time you have to carry out your plan. Living your plan will also allow you to adapt your plan if it needs tweaking. In addition to Plan A, have a Plan B, just in case.
Once created, review your wealth plan at least quarterly to stay on track.
Be Aware of Taxes
Taxes are a huge expense for most people. The more money that goes to pay taxes, the less money you’ll have for making sure you don’t outlive your money.
Be sure to consider taxes in your overall wealth plan. Some simple ways to lower taxes include:
1. Sell your losing investments each year and replace them with similar investments. You can harvest losses with stocks or funds. Many wealth advisors will handle tax loss harvesting for you.
2. Meet with your CPA annually some time between November through January to see what steps you can take to lower your taxes for the new year. Make sure you’re maxing out on tax incentives and tax credits that you qualify for.
3. Understand your taxes so you can factor them into major financial and investing decisions.
4. Know what your highest marginal rate is.
5. Buy a very basic book on taxes to stay informed. It’s great bedtime reading for when you can’t sleep.
6. Create assets with tax benefits, such as real estate rentals and small business.
Wealth Management Fees
Investing has a lot of hidden costs. Find out the total amount you’re paying for your investments. Paying 1% to 2% or more every single year in investing fees can greatly eat into your investment accounts.
For many investors, the expense of wealth management is worth the cost. This may be the case for you.
The only way you’ll know is if you understand your investments enough to evaluate the job your financial advisor is doing.
The less you pay for investing costs, the more money you’ll have to grow, and the less likely it is that you’ll outlive your money.
Have an Emergency Fund
An emergency fund allows you to pull money for emergencies without feeling defeated. This is more likely to lead to success in not outliving your money. An emergency fund can also help implement Plan B.
Know Your Net Worth
If you don’t know where you are, you can’t know how to get where you want to go. There are so many reasons to know your net worth.
Net worth is the foundation for planning. List your assets and subtract what you owe. There’s your net worth. Why is it that so many people hate doing this? It’s easy.
Update your net worth at least once a year or after major market declines. Quarterly net worth updates are even better.
Lewis Carroll said “If you don’t know where you’re going, any road will get you there.” Take the time to clarify what it is that you want. You’ll use your goals in the wealth plan you’re going to create. This will lay the foundation for not outliving your money.
Many people put off goals because they think goals must be set in stone. They like flexibility. Goals can provide a rough draft for your life that can be tweaked as needed.
A rough draft of goals is way better than no goals.
Think of bucket lists, desired retirement age and lifestyle. Think of possibilities and opportunities, not fear and limitations. Now you’re motivated.
Years ago, I heard Scott Burns say that most people buy their largest home when their children are in high school. I have seen this many times.
By the time the kids are in high school, a couple has saved enough money to buy their dream home. But most children move out within a few years, leaving the parents with an expensive, empty house.
A house takes time to maintain. While houses can provide a nice tax free capital gain under certain circumstances, they are a huge factor in your cost of living.
Taxes, upkeep, lawns, and utilities all eat into the money that can be put aside to make sure you don’t outlive your money.
Now you know how to not outlive your money. What action makes the most sense for you to take now?