How to avoid going broke in retirement

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Retirement is a dream for many — a time to relax, travel and pursue hobbies. But the reality can be quite different if you’re not financially prepared. That’s why the fear of outliving your savings is a major concern among retirees. 

However, with proper planning and discipline, you can make your golden years more comfortable and less stressful. In this guide, we’ll explore general steps to help you bypass financial pitfalls and avoid going broke in retirement. A financial advisor can help you make a more personalized plan.

6 steps to avoid going broke in retirement

1. Opt into automatic contributions

The first step any employee should take, if it’s available to them, is to set up automatic contributions for their employer-sponsored retirement plan. These plans usually come in the form of a 401(k), but government employees can see their contributions made into a 403(b) account, among others.

Even 2 or 3 percent of your monthly income contributed toward retirement can make a big impact and get you on track.

Making these contributions as early as possible will also ensure the money has longer to grow, which can yield larger returns to last you longer into retirement.

And once you’ve set up your 401(k) plan, the next best step is to take advantage of your employer’s contribution match. Many companies offer to match what you contribute to your 401(k) or other qualified plan up to a certain percentage.

Each company has its own rules and limitations when it comes to plan matches. Some require you to work at the company for a certain amount of time before they begin to match your contributions, sometimes a year or two. This is called a “vesting period.” It’s important to check with your employer to see what their specific plan regulations are.

2. Invest spare money

Once you have set up automatic contributions to an employer-sponsored plan, it’s important to take advantage of other retirement plans. Investors have the option of putting money into a traditional IRA or Roth IRA that can help supplement their 401(k) income.

Both traditional and Roth IRAs are intended for retirement and can begin distributions at age 59 ½. The contribution limit to any IRA is $7,000 for 2024, and if you are 50 or older, you can contribute $8,000 total to IRA accounts as a “catch-up” provision.

Contributions to traditional IRAs are taxed similarly to traditional 401(k)s — money goes in pre-tax, grows tax-deferred, and is taxed on the back end during distributions. In contrast, Roth IRA money goes in after-tax, grows tax-free, and is taken out tax-free in retirement.

3. Consider toggling accounts during distributions

Once you’ve set up both a 401(k) and IRA, consider toggling the withdrawals during retirement to allow room for growth. This strategy works particularly well with a traditional 401(k) and Roth IRA.

The 401(k) withdrawals will be taxed as ordinary income, but the Roth can be withdrawn tax-free. By withdrawing from only the Roth IRA in one month and then the traditional 401(k) in the other, you can reduce your taxable income overall.

By paying lower taxes, you’ll keep more money in your accounts working for you.

4. Invest with income in mind

After you’ve locked in your retirement plan contributions, it’s a good idea to invest in income-producing investments.

One such investment is dividend stocks. These stocks can produce a return like any other stock, but can also pay out a monthly dividend back to investors. Dividend stocks are often large, blue-chip companies that might not provide as much growth as riskier investments, but can provide safety and income — both critical for any retiree.

Bonds, specifically government bonds, are another income-producing investment that can provide security and extra income to investors who are looking to not have their money simply sitting in cash.

5. Create second income streams now

One of the best ways to safeguard against running out of money is to keep making more of it. Even after you retire, you can continue to pursue passions or utilize a lifetime of earned skills to generate extra income.

Be it through a side hustle or part-time job, setting up a secondary source of income now can allow for another stream of income to fall back on once you retire. You can still collect your full Social Security benefit and have extra income on the side as long as you are past the full retirement age, which is 67 for most people.

Side hustles for retirees have become more ubiquitous in recent years, as sites like Upwork and Fiverr have allowed people with expertise in almost anything to monetize their abilities.

6. Consider buying an annuity

An annuity is a financial product that provides a guaranteed income stream in retirement. It can be a valuable tool for protecting your savings and ensuring a steady income. 

There are several types of annuities. Some offer a fixed rate of return, while others calculate your returns based on underlying investments. Some begin paying you right away and require a large upfront sum to get started, while others begin years in the future and allow you to make regular contributions over time.

While annuities are often marketed as a way to avoid going broke in retirement, they come with risks. The contracts can be loaded with fees, and your money becomes difficult and costly to access, especially once you start receiving payouts. It’s important to consult with a financial advisor to determine if an annuity is right for your retirement goals and risk tolerance. 

How many years should you plan for in retirement?

Determining how many years to plan for retirement is important but there’s one problem — no one knows exactly how long they’ll live. While there’s no one-size-fits-all answer, a common estimate is 25 to 30 years. 

How long you’ll actually spend in retirement is influenced by a variety of factors, namely  your life expectancy, health and gender. A typical American man at the age of 65 is likely to live an additional 9.8 years, while a 65-year-old woman is expected to live another 15.2 years. So if your retirement planning is based on reaching 80, it might not be enough for everyone. 

Remember, it’s always better to overestimate than underestimate the length of your retirement. Planning for a longer retirement can provide you with a greater sense of security and financial peace of mind. It’s always recommended to review your retirement plan and implement necessary changes as you grow older. 

To get a better idea of how long your retirement funds might last, you can use Bankrate’s retirement calculator.  

Bottom line

Retirement can be a golden period of your life if you plan carefully and make smart financial decisions. Ensure you’ve factored in all aspects, including the duration of your retirement, your lifestyle choices and the impact of inflation. Don’t forget to revisit your retirement plan regularly and make necessary adjustments. And remember, financial security in retirement doesn’t just happen, it takes thoughtful planning, commitment and, yes, money.