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8 Steps to Make Sure You Don't Go Broke in Retirement

Spend carefully and use Social Security wisely

confident woman standing in front of a comprehensive budget plan drawn out in numbers and charts on a chalk board

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En español | You've worked hard your whole life to be able to enjoy retirement. Once you enter that phase, the goal is to make sure your money lasts as long as you do. To that end, here are some things you can do to drastically increase the odds that you won't run out of money.

1. Set a realistic spend-down rate.

How much of your portfolio funds can you safely spend each year? By my calculations, I think withdrawing 3.5 percent of your balanced portfolio in the first year and increasing that amount each year by the rate of inflation are relatively safe actions if you're around 65 years old. This means that if you had $100,000 in investments and home equity, you could spend $3,500 the first year. With 2 percent inflation, you could increase it by $70 the next year, and so on. (Don't forget you'll be getting Social Security, too.)

2. Have a backup plan.

Investing is uncertain, and things may not go as planned. Look at your expenses and decide what's nondiscretionary (property taxes, utilities, food) and what's discretionary (travel, entertainment). Then examine those discretionary items and decide how much you could reduce them should markets plunge and not quickly recover.

3. Inventory what makes you happy.

Analyze your nondiscretionary expenses and recall which ones brought you bliss. Typically, the new car doesn't bring as much long-term happiness as taking the grandkids out for a meal or on a vacation. Financial journalist Jonathan Clements notes that research shows that experiences typically bring more joy than stuff does.

4. Take a part-time job doing something you love.

I'm a believer in phased retirement. From an emotional standpoint, it's hard to go from decades of working full time to having no routine at all. But from a financial standpoint, working part time accomplishes two financial goals. It brings in cash and gives you less time to spend money, as well. Don't take a stressful job, but consider earning a bit doing something you love. “Life in retirement is much more than a 25- to 30-year vacation,” says Steve Vernon, author of Don't Go Broke in Retirement. "Finding work that you enjoy is a great way to put extra money in your pocket, have a reason for getting up in the morning and to be out in the world."


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5. Buy a U.S. government inflation-adjusted annuity. 

This is simple: If you delay taking Social Security benefits by four years, you can increase your monthly paycheck by 32 percent. I tell people to think differently about the decision. If, say, a 66-year-old could get $2,000 a month if she elected to start Social Security payments now, I tell her to go ahead and spend that amount now from her portfolio. What she is really doing is buying a payment that could be $640 a month higher if she waits until age 70. And each year, your payment gets adjusted higher for inflation. Higher guaranteed inflation-adjusted income reduces the odds of running out of money. “Delaying SS is still a good idea even if you believe there will be reductions in the future,” Vernon says. Why? Because you still receive a percentage of a bigger number.

6. Be frugal, but focus on the big things.

I'm all for being frugal, and I love AARP's annual list of 99 ways to save. But focus on the big dollars. Buying a modest car and keeping it for a decade or longer are the single biggest way to save. Downsizing the house can save a bundle, too, Vernon told me, but moving to a different state is another matter, as your network of friends and family is a key to happiness and longevity. Getting insurance quotes every couple of years may not only save you significant cash but also make sure you are insuring just for what you can't afford to lose. Comparing prices is so much easier online. Before I buy products on the web, I Google the site and the words “promo code.” Often, a minute can save a few bucks. Consumer advocate Clark Howard regularly comes up with amazing deals.

7. Keep your investing fees low and your discipline high. 

When we buy things, we get feedback on how much we are spending from our bank and our loved ones. In investing, however, we have to do more work to get that feedback, such as looking up the fund fees through sites like Morningstar. Research demonstrates that lower fees typically yield greater returns, and that gives you more money to spend. There is always the possibility that when the next bear market strikes, you will panic and sell a low-cost fund; that's where having the discipline to stick to an asset allocation is critical. For instance, if you sold in March, when the stock market shed 35 percent, you were likely taking on too much risk.

8. Keep cash working hard.

Today many banks are paying 0.02 percent or less on your money. But some online savings accounts are paying 0.70 percent or more and are FDIC insured. That may not seem like much, but each $10,000 pays $70 annually, which can buy a few nice meals a year. Depositaccounts.com and Bankrate.com are two good places to shop.

Take these eight steps and you'll be far more likely to fund the rest of your life. Then you can concentrate on whatever brings you meaning and happiness.

Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colorado. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and other publications. His contributions aren't meant to convey specific investment advice.

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