Do You Fear Running Out Of Money In Retirement?

Are you one of the many who fear running out of money more than you fear death? Believe it or not, more than half of the baby boomer generation holds this view.

Even though so many people have this fear, over 1/3 of this generation does not know if or when their money will run out in retirement.

The Problems With Life Expectancy

When calculating how long your money will last, what do you use for life expectancy? Some simply put in what they read about on mainstream media sites, which is about 79 years old. But this is usually a bad idea.

One’s life expectancy actually increases as that person survives another year. Let’s look at a white male born in the 60s. When he was born, his life expectancy was 68. But by the time he hits 40, he is expected to live to 72. If he lives until 70, he is expected to live until 80!

Why does this happen? It’s pretty simple, really. The way life expectancy is calculated is inherently flawed because it is an average number and suffers from what is called survivor bias.

What To Use For Life Expectancy

You should start with this free calculator from Vanguard. It will give you the probability of living to an age after you input some of your information.

It is prudent that most people, when creating a retirement plan, plan on having money until they’re at least 95 years old.

A Case Study

I ran a case study on a couple that is 52 years old today. They received the bad news that they will run out of money when they are 85 years old.

So what can they do? I ran some scenarios using the WealthTrace retirement planner to come up with some solutions. Here were my assumptions

One major problem here is that half of this couple’s investment is returning less than the inflation rate. This is a serious problem for them. If you cannot break even with inflation, you have very little chance of keeping your money through age 95.

To help them I repositioned half of their treasury investments into solid dividend-growth stocks such as Exxon (XOM), Johnson & Johnson (JNJ), and Procter & Gamble (PG).

Now they are beating inflation with dividends and they don’t run out of money until they’re 93 years old. If we move their retirement age out to 65, they won’t run out of money until they’re 98.

If you want to never run out of money and you plan on living a long, full life, make sure you are beating inflation with your investments. Also don’t assume that your life expectancy will be the average of everybody else’s.