- When you've spent your whole career saving for retirement, you want to make your money last as long as possible.
- A financial planner says four red flags alert him that someone's draining their retirement funds too quickly: withdrawing too much per year, an increase in spending, taking on debt, and not adjusting withdrawal rates with the market.
- Read more personal finance coverage.
Anyone who wants to retire knows the goal is to make your money outlast you.
Retirement isn't the time to realize that you're running out of money. But, Greg DuPont, a financial planner in Columbus, Ohio, says running out of money is avoidable with careful considerations of how you spend, withdraw, and save money. In his 15 years as a financial planner, he's come to find that it's all about balance.
"First and foremost, we need to look at how you want to live your life, and make sure that the funds support you," he says. "It's an art, not a science."
While each person's planning is unique, there are some universal red flags that retirement funds are draining too fast. For anyone who wants to make their money last and help them live their golden years comfortably, here are four signs you're spending your retirement funds too quickly.
1. You're withdrawing too much each year
Abiding by the "4% rule" - the strategy of starting your retirement by planning to take out 4% of your nest egg per year - might not work any longer.
But, DuPont says if you don't want to outlive your savings, you might have to plan on taking out less.
"Morningstar re-did that a few years ago based upon the economic conditions leading up to that study. And they reduced that number to 2.8% per year," DuPont says. Data from Morningstar showed that while a 4% withdrawal rate had a 50% chance of the funds lasting a retiree's lifetime, a 2.7% withdrawal rate increased those odds to 90%.
However, that percentage is based on a specific set of allocation guidelines and even economic circumstances - while it's a rule of thumb, that specific number won't work for everyone. "If you have a $1,00,000 portfolio, pulling out $28,000 a year doesn't always work," DuPont says." That's when we start looking at taking reasonable measured risk and managing the income as best as we can. Then, we can increase the amount a retiree can live off of quite significantly."
He suggests working with a financial professional to find the right number for you.
2. You're spending more than you used to, and your balance is suffering
If you're spending more each month than you did while you were working, you might be spending too much. "Are they doing things and spending money in a manner that is inconsistent with their lifestyle ahead of retirement?" DuPont says. "If so, that's an indication that maybe there's something going more awry in their world."
Generally, he recommends starting to level out your lifestyle costs going into retirement. "What I find for most people is when they get into retirement or near retirement, their lifestyle costs start to moderate," DuPont says. "It's when you start going beyond that where spending becomes a sign of trouble," DuPont says.
3. You're taking on debt
Having debt makes it harder to retire. And, if you can help it, retirement isn't the time to start taking on new debt.
"A lot of people come to come to my office and say, 'Here's my plan. I'm going to be debt-free going into retirement,' which is great, and it makes sense," DuPont says, "But, one thing to look for is when people spend beyond their means in a fashion that's driving them into debt."
Debt and retirement simply don't mix, and to him, seeing new credit or consumer debt is a sign that someone might be taking on more than they can afford."You can't run away from debt in retirement," DuPont adds.
4. You're not accounting for changes in the market
DuPont says that the rules can change with the times, and that's an important factor to consider as you start planning to make withdrawals from a retirement account.
"If people are not adjusting when we have the inevitable downs in the market, that's one of the things to look for," DuPont says. "Because that has an acceleration effect if they have money in the market and they're still pulling out the same way they were before. It just needs to be part of a monitored plan."
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