As you close in on retirement, you still have a lot of life to look forward to: Men age 65 today can expect to live to 83, and women to almost 86, according to data from the National Center for Health Statistics. That also means, however, that you have a lot years you're going to need to pay for. These three moves will help you to ensure you don't run out of money:
MOVE #1: Time your career exit on your terms
Some 65% of baby boomers plan to stay on the job after age 65 or never retire, according to a recent survey by Transamerica Center for Retirement Studies. Working longer extends your saving while reducing the number of years you must cover. You also get a fatter Social Security benefit for every month before age 70 you delay taking it. Now here’s the big catch: You can’t count on your job lasting.
Nearly half of current retirees ended up leaving work earlier than they planned.
And Boston College researchers found that in many professions people retire early because key abilities decline with age—dentists, for example, need to maintain fine motor control. In other jobs, older workers may lack cutting-edge skills. So by your fifties, take steps to extend your employability.
Stay engaged in your current career... Sign up for any training your employer offers, and look for skill-building courses online—AARP’s TEK Academy has free and low-cost courses on things like social media and web analytics. Many colleges offer certifications, a less expensive route than grad school, says Nancy Collamer, author of Second-Act Careers.
You might also talk to your employer about a phased retirement, in which you move to a part-time role. About 18% of employers in one survey said they offer it, and recently the federal government has been rolling out a program for its employees. But in most cases you’ll have to negotiate informally. Build a case based on the value you’d offer vs. a full-timer.
... or try one a new one. Mechanical engineer Smiley El-Abd, 63, built a business while pursuing something he loved. An avid cyclist, he began doing custom bike fittings for triathletes out of his basement in Kensington, Md. “My side job has turned into a dream job I will carry into retirement,” he says.
For most people, making a switch into something new will require new skills. Check out conferences offered by professional associations in the industry you’re targeting to determine the training you’ll need. If you’re thinking of a nonprofit career, volunteer with an organization in that field, says Chris Farrell, author of Unretirement.
MOVE #2: Try a practice retirement first
You may think you have a retirement plan that's good to go. But you won’t really know until you try it out. That’s why many financial planners suggest that you start “practicing” your retirement lifestyle when you’re within two or three years of quitting. This isn’t just about money: If you think you’ll want to move to a beach condo or a bustling downtown, for instance, take extended vacations in those locales. You may end up rethinking your plans. “I had clients who thought they would sell their home, live in an RV, and travel,” says Mary Lacey Gibson, a financial planner in San Juan Bautista, Calif. “I had them try it first, and they found they didn’t like RV living after all.”
There’s an even more important financial angle, however. You need to see how much of your nest egg you’ll really tap.
Try the "pinch" test. For a month of your practice phase, live on a budget that fits a common annual withdrawal rule, such as taking out 3% to 4% of your nest egg the first year, to be increased in later years by inflation. (Take the yearly amount and divide by 12.) You can read more about withdrawal rules here and here. If that amount pinches, you may need to adjust your plans, whether by working a bit longer, downsizing your home, or scaling back your lifestyle plans. Fortunately, those aren’t your only options.
Think more flexibly about income. Instead of a fixed withdrawal rate, ask yourself if you could live with a slightly variable income. Financial planner Jonathan Guyton of Edina, Minn., for example, calls for skipping an inflation-adjusted increase in spending or even taking out a bit less after years when the market falls. This increases your odds of making your money last, without forcing you to sacrifice spending year after year.
The good news is you may be quite comfortable with reducing spending in future years. Generally, there’s a burst of spending as retirement begins, “but that slows down dramatically later on,” says Katherine Roy, the chief retirement strategist at J.P. Morgan Asset Management, which was able to study the spending patterns of bank and credit card customers.
Similar findings were recently reported by Texas Tech researchers who looked at retirees with assets of $500,000 or more. “Many retirees could spend 40% more than they do without fear of running out of money,” says personal financial planning professor Michael Finke. “But after a lifetime of being frugal it’s hard for some to turn around and start spending.”
There’s a caveat, of course: Health care costs can be high in later years. If you have chronic health problems, you’ll need to stick to conservative assumptions about what to spend early on.
MOVE #3: Ease your way into a safer income stream
Investors looking for stability in frothy markets have poured $25 billion into indexed annuities so far in 2015. Right idea, wrong annuity. Unlike those complex and often cost-laden investments, a simpler tool called a fixed immediate annuity can be a good way to lock up guaranteed income. They aren’t so popular, though, with 2015 sales of about $5 billion.
There are some mental roadblocks to buying annuities. To get one, you have to write a big check, handing over a large portion of your life savings. In exchange, an insurance company gives you a regular monthly check for life, which is great, but you also lose growth potential, and the ability to access the money you put in if you run into unexpected expenses. And if you die relatively early, the insurance company, in effect, wins—you’ve left money on the table that could have gone to your heirs.
But retirement researchers are finding that using annuities isn’t an either/or decision.
A little bit goes a long way. A new study by Morningstar director of retirement research David Blanchett finds that putting as little as 20% of savings in an annuity helps you avoid ever running low on cash, if you combine it with a flexible spending strategy in which you spend less of your savings in bad market years.
You can also take your time before choosing whether to buy an annuity, adds Blanchett, and see how your investments do. Just aim to buy within 10 years of retiring, says Blanchett, to get the best deal and ensure you still have enough wealth to buy one.
Buy one for later. You can also opt for a slight twist on the plain-vanilla annuity. Deferred income annuities, also called longevity annuities, let you put down money now for income that starts in the future, perhaps a decade or more from when you buy.
The logic of this is that you are buying coverage only for your most unpredictable financial risk—that you or your spouse might live longer than you planned for. According to the Society of Actuaries, for a male-female couple age 65, there’s a 37% chance that at least one member will reach age 95, and a 12% chance one will live to 100.
The advantage of deferred annuities is cost. “With a deferred annuity you’ll pay a lot less for a dollar of income than with an immediate annuity,” says Dallas Salisbury, a resident fellow at the Employee Benefit Research Institute. Whichever way you go, you’re likely to find that when the markets are in turmoil, the promise of a steady income source can do a lot to keep your retirement on the right path.
Donna Rosato and Alexandra Mondalek contributed reporting to this story.