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Running Out of Money: Retirement’s Biggest Risk and How to Avoid It

Running Out of Money: Retirement’s Biggest Risk and How to Avoid It

| November 09, 2023

We tend to think of retirement as our “golden years,” a time when we’ve quit working and earned the right to relax, travel, and generally just do whatever we feel like and live as close to a carefree life as we can. And yes, that’s ideally how it should be. Unfortunately, there’s a serious risk involved in retirement that can’t be ignored: running out of money.

There are several factors involved in this risk that you need to be aware of. Any of these either alone or in combination with the others can drain your finances. But never fear—there are effective ways to significantly reduce these risk factors! Let’s take a closer look… 


You never know what the future holds. Unexpected, serious medical issues are a possibility at any time, but more so in the typical retirement age range. The first and best way to mitigate this risk is to consult your doctor for advice on eating a healthy diet and getting regular exercise. You should also take healthcare costs into account when making retirement savings plans. Options include having an investment account dedicated to healthcare expenses or creating a health savings account. If you’re already at retirement age and haven’t taken this step, take care to select the insurance plan best suited to your needs during Medicare open enrollment.


Research shows that if you make it to age 65 you have a 25% chance of living to 96 or older. While it’s nice to know the odds are decent for living to such a ripe old age, it can be a serious problem if you’re “unfortunate” enough to outlive your assets, forcing you to reduce your standard of living and level of care. You might even have to start working again. You can avoid this unpleasant fate if you make sure to have a big enough retirement plan capable of providing a solid income at a safe withdrawal rate for decades to come. It’s also helpful to maximize your Social Security benefits by retiring as late as possible.


It’s a simple and immutable fact of life: as time goes by, stuff costs more. So a fixed income buys gradually less over time. Social Security payments are adjusted for inflation, but your private retirement plans may not be unless you make sure to take it into account. The current inflation rate is at 3.7%, but the annual average is 3%. You need to make sure your earnings stay ahead of this rate. If not, you’re de facto making less money over time. Remember that your annual earnings growth is actually that percentage minus the inflation rate.


Just as gains are inevitable, losses in the market are going to come around here and there as well. To mitigate loss, make sure your assets are well allocated and don’t invest more of your nest egg than necessary in stocks. Consult a good advisor to ensure your portfolio is diversified with a sensible investment strategy.


Entitlement programs such as social security may not remain solvent forever. Congress seems to become more dysfunctional every day, and the possibility exists that benefit cuts or even the elimination of the program could eventually occur. It’s much better to depend on your savings and investments and just think of Social Security as gravy rather than the main financial course.

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Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. Moderate inflation is a common result of economic growth. Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.

There is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, nor does diversification assure against market loss. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase through periods of fluctuating price levels.