INSIGHTS

Retirement is supposed to be a time for enjoying the fruits of decades of hard work—foreign travel, new hobbies, lowering your golf scores, and spending more time with loved ones. But for many, it can be a time of anxiety, especially when it comes to money and an investment process they have no control over. 

The question that begs to be answered is, “Will my money last?” Unless they have more money than they can ever spend, just about every pre-retiree or current retiree is concerned about running out of money late in life. 

This concern is exacerbated by rising longevity. It is very common for one or both spouses to live well into their 90s, which can be 30 or more years of retirement.

Fortunately, with careful planning and proven investment strategies, you can alleviate these concerns and create a sustainable retirement plan that allows you to enjoy your golden years with peace of mind.

As Houston fiduciary financial advisors, the Precedent Wealth Partners team has provided retirement planning services for over 40 years. Everyone has unique situations, so we don’t use generic, cookie-cutter, one-size-fits-all strategies to plan your retirement and manage your wealth.

In this article, we’ll explore one of the most common financial anxiety-related issues, outliving your money, and describe various solutions that can help ensure your assets and income last throughout your retirement years.

Retirement Concern #1: Will I Outlive My Money? 

One of the most significant retirement fears is the possibility of outliving the income produced by your savings. With longer life expectancies, the risk of depleting your retirement accounts is a real concern because one or both spouses could live to be 100.

This is where a well-defined withdrawal strategy can play an integral role in improving the chances that your retirement savings will not fail you later in life. Following are several withdrawal strategies for your consideration.

Strategy #1: Safe Withdrawal Rate (SWR)

Start by setting a conservative withdrawal rate that you are comfortable with. For instance, you withdraw 4% of your retirement assets market value in the first year and then continually adjust the dollar amount for the inflation rate in subsequent years.

For example, If you have a $1 million retirement portfolio, you would withdraw $40,000 in the first year. In the following years, they would increase that amount based on inflation to maintain purchasing power.

You expect these distributions to be more than offset by capital appreciation, dividends, and interest. Therein lies the secret for never depleting the assets that produce the income.

Strategy #2. Income Buckets

This strategy divides your assets into different “buckets” based on when the money will be needed. For example:

• Short-term bucket (1-3 years): Cash equivalents and maturing short-term bonds are available to cover expected and unexpected expenses.
• Medium-term bucket (4-9 years): Balanced stock and bond portfolio with higher dividend-paying stocks for moderate growth and income.
• Long-term bucket (10+ years): Growth-oriented investments like stocks and real estate equity designed to provide appreciation over longer periods.

Example: Of your $1 million portfolio, you invest $120,000 in cash and short-term bonds (three years of distributions at $40,000 per year), with the remainder of the portfolio split between moderate (medium bucket) and growth investments (long-term bucket) for future withdrawals.

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Strategy #3. When to Begin Taking Social Security Benefits

Most people think they should automatically begin claiming their Social Security benefits when they turn 65. However, this may not be the best move based on factors such as current health, longevity expectations, lifestyles, taxes, and other variables that impact your longevity and net income. Others are convinced that starting as early as possible (typically age 62) is the best strategy.

If taking your Social Security benefits increases your tax bracket, consider postponing the start date as long as possible. On the other hand, if you are in poor health or simply need the income, it may be more prudent to begin claiming your benefits sooner so you can use those funds to assist in paying for healthcare and other living expenses. 

You can claim benefits as early as 62 or postpone it until 70. The “full retirement age” is in the middle at 67.

For example, your full retirement age benefit at age 67 is $2,500 per month. If you were to start taking payments at age 62, your benefit would be roughly $1750 (30% less). If you delay claiming your benefits until age 70, your monthly benefit increases to $3100, providing additional income later in life when rising healthcare and living expenses may deplete other assets. There is no “right” answer. Every situation is different.

Strategy #4. Dynamic Adjustments

This withdrawal strategy adjusts based on market performance. If your portfolio performance exceeds expectations, you can withdraw a little more. If the market underperforms, reduce withdrawals temporarily to avoid depleting the portfolio too quickly (depreciation and distributions).

Example: In a strong market year, you might consider withdrawing 5% instead of 4%, while in a downturn, you might reduce withdrawals to 3% to preserve your principal that produces income.

Strategy #5. Tax Efficiency

This strategy is based on withdrawing from accounts with taxable and tax-free accumulations and distributions. Typically, you would withdraw from taxable accounts first, followed by tax-deferred accounts (like IRAs or 401(k)s), and finally, tax-free accounts (like Roth IRAs) to minimize taxes and maximize tax-deferred growth.

This tax-sensitive withdrawal strategy provides flexibility, balances income needs with long-term growth and helps manage risks like market volatility, inflation, and longevity. Working with a financial planner in Houston, TX, can ensure your strategy is balanced to meet your needs and goals.

Example: Let’s say you have a taxable brokerage account that you can begin drawing from early in your retirement years. This allows you to let your tax-deferred IRAs, 401ks, and Roth IRAs grow tax-deferred or tax-free. It may also offer an attractive window to make Roth conversions of traditional IRA assets.

As you age, you can begin drawing from traditional IRAs and Roth IRAs more tax-efficiently.

This tax-sensitive withdrawal strategy provides flexibility, balances income needs with long-term growth, and helps manage risks like market volatility and longevity. Working with a financial planner in Houston, TX, can ensure that your strategy is well-suited to your individual needs and long-term concerns.

Watch our co-founder, Harold Williams, discuss how to build a sustainable retirement income stream.

Strategy #6: Living Within Your Means Once Retired

Living within your means is another crucial aspect of successful, long-term retirement planning. Once you’re retired, your income is typically fixed or drawn from your investments and savings, so managing your expenses becomes more important for ensuring your long-term financial security. Many retirees face the temptation to maintain or even increase their pre-retirement lifestyle, which can strain their finances later in life. 

By creating a realistic retirement budget that aligns with your current income and assets, you can avoid overspending and reduce the risk of running out of money late in life. This includes differentiation between essential expenses—housing, healthcare, and utilities—and discretionary spending like travel, hobbies, or second homes. 

Strategy #7: Inflation Erosion

Inflation is the silent thief that can erode your purchasing power over longer periods. Even moderate inflation, if it lasts long enough, can significantly impact your ability to maintain your standard of living for 20 or 30 years of retirement.

Incorporating growth-oriented investments into your portfolio is essential to combat inflation and protect the purchasing power of your retirement assets. Tactics such as investing in stocks, real estate, and Treasury Inflation-Protected Securities (TIPS) can help your savings outpace rising costs over time. 

A diversified portfolio that includes these inflation-resistant assets and a focus on conservative, long-term growth can help preserve your purchasing power throughout decades of retirement. 

If you’re ready to secure your later retirement years, connect with our team of retirement planning professionals.