The Fear Of Running Out Of Money In Retirement Is Overblown

The fear of running out of money in retirement is a rational one. After all, you’ve spent your entire career making and saving money, not pilfering your retirement accounts.

I admit. One of my biggest concerns about early retirement was running out of money. I couldn’t help but worry about what ifs.

What if there was another massive correction in the stock market like we saw in 2008-2009? What if my rental properties went vacant for an extended period of time?

Or what if Financial Samurai died? What if I accrued unexpected medical expenses? Perhaps I underestimated how much I needed to be happy? 

Such worrisome thoughts can paralyze even the best of us.

Whether you decide to retire in your 60s or in your 30s, I’m here to say the fear of running out of money in retirement is overblown. The media, money managers, and government officials, most of whom are still working, have fear-mongered the general population long enough!

As someone who left the working world in 2012 at the age of 34, let me explain why your retirement life will probably be just fine.

Making Your Money Last In Retirement

Here are some reasons why the fear of running out of money in retirement is overblown.

1) You will need less than you think.

My biggest surprise since retiring has been how much less I need to live a comfortable retirement life. Like any good retiree, we plan for multiple scenarios over an extended period of time before making a decision. 

I spoke with at least three dozen retirees about retirement spending and they all said they are spending much less than they anticipated. For myself, on average I’m spending 30% less than projected.

It costs nothing to play tennis at a public park. There are plenty of cheaper food alternatives once you no longer have to work in an expensive downtown area. You can read all the latest magazines at your local library, surf the web, and enrich your mind with classic literature for free. Take one look online and you’ll find a plethora of free activities.

2) You don’t need to save for retirement once you are retired.

What many retirees “forget” is that once they reach retirement, they no longer need to save for retirement. It’s not so much forgetting, but being so accustomed to saving for so many years that you just can’t stop! For example, if you’ve spent a lifetime maxing out your 401k, you’ve suddenly got $20,500 a year more in gross disposable income.

For the life of me, I cannot stop trying to save at least 50% of my after-tax income, while also contributing as much as possible to my Solo 401k even though I’m supposed to live it up more in retirement. After aggressively saving since your first paycheck, saving just becomes part of your DNA due to an unknown future.

3) You will adapt to different income levels.

For the first two years after I left my job, my annual income decreased by 70% – 80%. Yet looking back, there were minimal lifestyle changes. I still lived in the same house that I had been living in for seven years prior.

I still stayed in the same house in Hawaii for the past 30 years every time I visited my parents. Further, I also drove the same paid off car for a couple years until I bought a new compact car. My old car could no longer pass the smog exam.

Yes, I had to cut back on eating steak for a couple years. But I replaced $50 dry-aged steaks with $2.5 In N’ Out cheeseburgers. Yum! Instead of eating sashimi, I ate marinated tilapia. Still quite tasty.

Just like the lifestyle of a one percenter is not much different from the lifestyle of a middle income person, as long as you have the basics covered, the lifestyle of a lower income person isn’t much different from a middle income person either. The lower income person has a harder time saving for retirement, which ironically gels well with a retiree who doesn’t need to save for retirement.

As long as I have food, shelter, clothing, dental floss, companionship, and internet access, I’m 85% of the way there. For most of you, it’s going to be the same thing. The joy of doing anything you want, whenever you want more than makes up for a lower income.

4) You will be in a lower income tax bracket.

The great thing about making less money is that you’ll be in a lower income tax bracket. Therefore, you’ll have a relatively higher amount of disposable income for each dollar earned.

In 2022, not only is federal marginal income taxes lower than before the Tax Reform bill was passed, corporate tax rates and small business pass-through income tax has fallen to 21%. That said, Biden may be raising taxes again.

It felt wonderful going from a 39.6%, 35%, or 33% marginal income tax bracket (depending on my deductions and bonus) to a more reasonable 22% – 24% tax rate for a couple years.

Just imagine killing yourself at work for 70 hours a week to give over 50% of some of your income to a fiscally irresponsible government. No thank you. Such a high tax rate is why I’m thinking of re-retiring over the next couple of years.

Further, check out the long-term capital gains tax rates. Pretty reasonable nowadays for those of you who are earning passive income.

The double benefit of no longer having to work and paying less taxes will make you much happier. You’ll actually start feeling like you’re getting your money’s worth.

5) You will find many ways to make money.

If you retire with only part of your living expenses covered, logically you’ll need to come up with a solution to cover the “income gap” required by your desired lifestyle.

Throughout our entire careers, we are always asking for more. Thus, in retirement it’s often hard to accept less. But once we learn to control our egos, a bevy of new income earning opportunities materialize.

Since retiring, I’ve done consulting with four financial technology startup companies at an hourly rate 60% – 80% less than what I used to earn at my full-time job.

Initially, it felt odd making so much less. But I soon got over it because the experience was fun and I was learning something new. I even let some people who had no idea what they were doing, tell me what to do!

I also published a book teaching people how to negotiate a severance that generates ~$40,000 a year in passive income.

I’m also publishing a traditional hard copy book with Penguin Random House called Buy This, Not That: How To Spend Your Way To Wealth And Freedom. The book should be one of the best personal finance and life books today. Chances are decent it will be a bestseller and generate royalties.

Adventures In Uber Driving

Then I really squashed my ego and spent time driving for Uber for $25 – $35 net an hour. One time I picked up an ex-client at his place in Pacific Heights. Perfect. I wanted to see if making a living driving was possible. It’s hard, but doable. The experience was good and driving added about $5,000 more gravy to my plate in 2015 and 2016 before I decided it wasn’t worth it anymore.

If you don’t have a car, not to worry. Recently, I hired some “Taskers” from TaskRabbit to help transport some furniture from a buddy’s place to my house this past weekend. After paying a 35% (!) commission to TaskRabbit, the Taskers still made $54 an hour. You can be a dog walker or a pet sitter on Rover.

If you’re allergic to all animals, don’t worry. You can always sign up to be a greeter at Walmart or flip burgers at McDonald’s while also eating free food. You’re not too proud to work a minimum wage job are you?

If you are willing to swallow your pride and make much less than you once did, you’ll have no problem making up the income gap between your covered expenses and your desired lifestyle. Running out of money in retirement isn’t possible if you have your head on straight.

6) You have more to offer than you think.

When I left finance, I thought I ‘d be done for good because I didn’t think I had any transferable skills like a software engineer or electrician. When you’re used to doing one thing for a large portion of your life, you begin to doubt your versatility. Every colleague I spoke to felt the same way, which is why so few ever leave.

Having transferable skills is overrated. All you really need is to be: 1) likable, 2) trustworthy, and 3) consistent. To make life easier, build a higher EQ. Anything technical can be learned on the job.

Think about how much you remember from high school and college. Not much! The CEOs earning $25 million a year aren’t coding or rewiring your house. All they’re doing is managing people, building business relationships, and being a good ambassador of the firm.

Given you’re close to or already retired, what you’ve got more than most is experience. Experience cannot be taught or bought. Acquiring it takes time. Your experience is extremely valuable.

I never anticipated companies approaching me for online marketing consulting work. But at least eight firms have done so because since 2009, I’ve organically built my own platform into something significant. For any startup that wants to build its brand online, this is valuable experience.

7) Your existing assets have upside.

You might have a business that invites couples into your home to learn how to cook. Why not expand and shoot videos of the cooking sessions to sell online?

You might have rental property that hasn’t been spruced up in a while. Perhaps if you did some minor remodeling, you could get a much higher rent.

Your investments might not be properly allocated based on the current state of the economy. Perhaps instead of having 50% of your assets in a Treasury bond yielding 1% in a bull market, you could double your money by allocating more to blue chip dividend stocks that pay more than a 2% yield and provide stronger capital appreciation.

Or perhaps instead of having 100% of your net worth in public equities, you should be more diversified in order to not get pummeled during the next downturn.

I’m currently bullish on real estate in the heartland of America for the next decade due to positive demographic trends. As a result, I’ve been aggressively investing in real estate crowdfunding projects in Texas, Nebraska, Colorado, and Utah through real estate crowdfunding.

With lower valuations and higher rental yields, I strongly believe the trend is for more workers to work out of lower cost of living cities thanks to technology. I’m shooting for a 8% – 15% return on my investments as real estate is my favorite asset class to build long-term wealth.

It’s rare that all of our assets are fully optimized. We can probably all do some fine-tuning to make our existing assets generate more income. It’s just a matter of taking the time and expending the energy to make it happen. Don’t let a steady paycheck make you comfortably numb!

8) You can always tap your pre-tax retirement accounts early.

If you so happen to retire before the age of 59.5, you can follow Rule 72(t) and withdraw money from your pre-tax retirement accounts penalty free provided that the holder take at least five “substantially equal periodic payments” (SEPPs) or until age 59.5, whichever is longer e.g. someone retiring at age 50 would have to take 10 SEPPs.

According to the IRS, the maximum you can borrow from your pre-tax retirement account such as a 401k is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. For example, if a participant has an account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.

Finally, you could simply pay a 10% early withdrawal penalty if you were absolutely desperate. Luckily, if you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.

9) You can create your own destiny.

Let’s say nobody at McDonald’s is willing to hire you. Why not be your own boss? Startup costs are extremely low nowadays. All you’ve got to do is throw up a site for less than five bucks a month and you’re literally in business.

After retiring, I wanted to take Financial Samurai more seriously. So I committed to writing at least three posts a week by spending 2-4 hours each morning before tennis.

I didn’t know exactly how I was going to build the business, but I knew that if I kept on writing, opportunities would arise. After a full year of sticking to my plan and publishing my severance negotiation book, the traffic on this site grew as did its income.

My story is a classic case of “do what you love to do, and the money will follow.” To maximize profits, I should spend more time optimizing this site. But why bother when this site’s income is already a bonus? I’m having too much fun to go back to a stressful work mindset.

The key is to just start your own site / business endeavor. You don’t need to have all the variables pre-mapped because as you tinker, your variables will change. Overanalyzing a situation will make you do nothing.

10) Plenty of safety nets.

Let’s say even with the use of free financial tools online to manage your net worth and forecast your retirement cash flow, you miscalculated how much you need in retirement. 

For whatever reason, you’re also unable to generate the required extra income to make up the shortfall. You’re running out of money in retirement. Your savings are depleted, your passive income streams dry up, your business ideas all suck, and nobody likes you.

Not to worry! You’ve still got family, insurance, and the government to help out.

If you just can’t make it on your own, there may be a family member who can lend a helping hand. If your parents are no longer living, perhaps you have a sister, brother, nephew, or niece who will provide shelter until you find work again. I know if anybody in my extended family needed help, I’d do so without question.

Finally, if you’ve just got nobody, the government has programs that can help you with food, employment and shelter. Social safety nets should grow under a Biden Presidency, not shrink. Running out of money in retirement declines under a Democratic president.

You’re Stronger Than You Think

If you’ve been able to entertain legitimately the idea of retiring early, then you probably also have the intelligence, courage, and game plan to adapt to any unexpected changes that happen after retirement. Running out of money in retirement is highly unlikely.

Change is scary. But the fear in your head is almost always greater than the reality. Just make sure you have something you enjoy doing once you pull the ripcord. You might have so much free time you won’t know what to do with yourself!

Related: What Retirees Fear The Most Today And Their Top Financial Goals

Recommendation To Build Wealth

Running out of money in retirement is unlikely if you track your wealth like a hawk. To do so, sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances.

In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. 

I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Build Wealth Through Real Estate

In addition to investing in stocks and bonds through your 401k, I recommend diversifying into real estate as well. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.

Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity. 

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and earn retirement income 100% passively.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a eREIT is the easiest way to gain real estate exposure in a low volatile way.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. You can build your own select real estate portfolio with CrowdStreet.

I’ve invested $810,000 in real estate crowdfunding to diversify my net worth and earn income 100% passively. With ~$100,000 in passive income coming from my 18 investments, I’m not worried about running out of money in retirement.

Both platforms are free to sign up and explore. 

The Fear Of Running Out OF Money In Retirement is an FS original post. I’ve been “retired” since 2012. But the reality is, I’ve been working on FS for ~20-25 hours a week and exploring new interesting things since I left work.