By Sophia Financial Solutions | Published: November 13, 2024

Imagine this: You’ve spent decades working, saving diligently, and preparing for your golden years. Then retirement finally arrives. You should feel secure, relieved, and ready to enjoy the fruits of your labor. But instead, there’s that persistent worry in the back of your mind: "What if I run out of money?" According to multiple studies, the fear of running out of money in retirement is stronger than the fear of death for many Americans. And honestly, that fear isn't irrational. In today’s economic climate, with longer lifespans, unpredictable markets, and rising costs of living, running out of money is a real risk. But the good news? There are steps you can take today to ensure your money lasts as long as you do. This article will address why this fear is so pervasive (and justified), the risks traditional retirement planning often overlooks and the strategies you can use to build lasting financial security.

The Facts...

Why the Fear Is Real - Longevity is a Double-Edged Sword

People are living longer than ever before. That’s great news in many ways, but it also means your retirement savings have to stretch further. Living into your 90s isn’t rare anymore and if you retire at 65, that’s 25 to 30 years of income you need to fund.

Inflation and Rising Costs

Let’s not ignore inflation. It quietly - but persistently - erodes your purchasing power every single year. Even a modest 3% annual inflation rate cuts your spending power in half over 24 years. If you're not factoring inflation into your retirement planning, you may find your fixed income isn’t so comfortable down the road.

Market Volatility

Traditional retirement accounts like 401(k)s and IRAs are often heavily tied to the stock market. While markets tend to rise over the long term, they also fluctuate...and sometimes wildly. If a major downturn hits just as you begin withdrawing funds, the impact on your nest egg can be devastating. And just look at the numbers. However much the market may decline, it must increase a full 100% to simply get you back to where you were.

Healthcare Costs

As we age, our healthcare needs increase and so do the associated costs. Medicare doesn't cover everything, and unexpected medical expenses can drain your savings quickly. And studies show that 70% of people over 65 will require some form of care like assisted living, memory care or a nursing home stay. And those costs can average $5,000-$7,000 per month depending upon the facility and part of the country.

What Traditional Planning Misses...

The Withdrawal Dilemma

Conventional wisdom suggests withdrawing 4% annually from your retirement savings. But what if your portfolio suffers a major loss leading up to or early in retirement? That 4% could suddenly represent a much larger slice of a shrinking pie. This is known as sequence-of-returns risk and it’s often overlooked.

Taxes in Retirement

Many retirees assume they’ll pay less in taxes once they stop working. That’s not always the case. If tax rates rise in the future (a real possibility given national debt levels), your withdrawals from tax-deferred accounts could cost you more than expected. And then there's another question: Do you actually want to be in a lower tax bracket, which by definition means you have less income. More income and greater tax efficiency should be the goal.

Over-Reliance on the Market

For decades, the "buy and hold" strategy has been the backbone of financial planning. But retirees don’t have the luxury of waiting out market corrections like younger investors. The rollercoaster ride can be more than just nerve-wracking — it can be financially damaging. And doesn't it feel like occasional market declines are happening with greater frequency?

Building a Strategy You Can Count On in Five Straightforward Steps...

Step 1: Identify Your Core Needs vs. Wants

Start by figuring out your essential expenses: housing, healthcare, groceries, utilities, etc. These are your non-negotiables. Once you know your monthly baseline, you can begin building a plan around securing that amount first. After those financial outlayes are accounted for, start planning for travel, hobbies, and other luxuries.

Step 2: Build Guaranteed Income Streams

This is where tools like Fixed Indexed Annuities (FIAs) come into play. An FIA offers the best of both worlds: growth potential linked to a market index (like the S&P 500) coupled with protection from market losses. Most importantly, you can add income riders that guarantee monthly income for life, no matter how long you live or what happens in the market. The availability of this "have your cake and eat it too" strategy is not widely known, but can be a game changer.

Step 3: Use Life Insurance as a Tax-Free Asset

Another lesser-known strategy involves Indexed Universal Life Insurance (IUL). While its primary purpose is to provide a death benefit, it can also build cash value over time which can be accessed tax-free during retirement. Properly structured, this can serve as a supplemental income stream or emergency fund. And an IUL has a host of other benefits like uninterrupted compounding of interest, significantly greater access to your money via loans and living benefits for events like chronic and critical illness.

Step 4: Diversify the Right Way

Diversification isn’t just about owning different types of financial instruments. It means balancing your portfolio across asset classes: stocks, bonds, real estate, annuities, and life insurance. The goal is not just to grow wealth...it’s to preserve it.

Step 5: Plan for Rising Costs and Long-Term Care

Consider inflation-protected income streams or policies that include long-term care riders. You may also want to explore hybrid long-term care insurance solutions that combine life insurance with long-term care benefits.

Real-Life Scenarios...

Scenario 1: The Market Crash Retiree

John retired in early 2008 with $600,000 in his 401(k). Then the market crashed. By the end of the year, his balance dropped to $380,000. He still needed to withdraw income, compounding the damage. He later admitted, “If I’d had a guaranteed income source, I wouldn’t have panicked or lost so much.”

Scenario 2: The Guaranteed Income Couple

Susan and Michael took a different path. They allocated part of their savings into a Fixed Indexed Annuity that would start paying them $2,000 per month for life, starting at age 67. Even though the markets dipped in 2020 and 2022, their income never skipped a beat and they slept well knowing their bills were covered.

Scenario 3: The Tax-Savvy Planner

Tina used Indexed Universal Life Insurance (IUL) as a supplemental retirement strategy. She was able to borrow tax-free from the policy during retirement while keeping her taxable income low, which helped reduce her Medicare premiums and kept her taxes in check.

Final Thoughts and Action Steps...

Retirement is far too important to leave to chance or to outdated planning strategies. Running out of money in retirement is not just a fear...it’s a very real possibility if you don’t have a plan that accounts for risk, taxes, inflation, and longevity. But you don’t have to face this alone. By working with an advisor who understands both safe money strategies and income planning, you can take the fear out of the equation. If you’re ready to talk about how to create income you can’t outlive and protect your assets from market losses, I invite you to schedule a no-obligation retirement strategy session.

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