Will the income from your 401(k) last for the rest of your life, or will you run out of money?
You can’t really know for sure—you can only project as best as possible. You can run a 401(k) withdrawal calculator that estimates your rate of return and your withdrawal rate to get an idea of how many months your money will last. But it’s only an estimate. One thing is certain, however: When you take out less money per month, your money will last longer.
Here are three ways to reduce how much money you withdraw so your income can last longer:
Of course, you can’t work forever, but delaying your retirement a year or two can make a huge difference in making your money last in retirement. Every year you work, your future retirement income has a triple benefit.
- You invest more while working those two extra years
- You live off a paycheck rather than a distribution from a retirement account
- You have two more years of investment earnings
Here’s how the math works (for simplicity’s sake, I’m leaving out an increase for inflation). If you have $500,000 in retirement savings, plan to take out $3,000 per month, earn 5% on your money over your lifetime, and pay taxes at 22%, according to this CalcXML’s calculator, you are good for 20.1 years.
If you work just two more years, you’d have invested another $25,000 per year ($19,000 maximum contribution for 2019 plus your $6,000 “catch-up” contribution). Let’s say your employer gave you a match of $5,000, so you invest a total of $30,000 per year for two years. You’d have added another $60,000 to your 401(k) by waiting 2 years.
Since you didn’t touch the funds, they may have grown a bit, too! In our example, we’re using a 5% growth rate. On a $500,000 balance at 5%, that would be $25,000 per year for a total of $50,000.
By waiting two years, you added $60,000 from your paycheck and the account grew by $50,000 (at 5%), for an increase of $110,000. Your balance is $610,000 instead of $500,000 if you followed these steps!
This way, your money would last 27.8 years instead of 20.1 years — almost 8 more years. You added 8 more years of income just by working an extra two (and, of course, adding money, getting a match, and earning 5%).
Is it worth it to work a couple more years? Maybe!
2. Create another income stream in retirement
Another way to reduce your need to take out funds from your 401(k) is to create some extra income on the side in retirement.
For example, my husband is retired, and he substitute teaches at a local high school a few days a week. It doesn’t feel like “work” to him, because this substitute teacher job so different than his career as a hospital administrator.
He doesn’t grade papers, participate in parent-teacher conferences, or create the lesson plans. He shows up, does his job and heads home. He loves it!
His pocketbook likes it, too. Jay spends his money on his hobbies and doesn’t have to tap into his 401(k) for lifestyle expenses.
There are many ways for you to work part time that don’t feel like work.
Go for the perks — work as a marshal or at the clubhouse of your local golf course. Get paid and pick up free rounds of golf. Or work as a “liftee” or an ambassador at your local ski resort so you can pick up complimentary lift tickets or a season pass through your work.
You don’t have to work at all to bring in extra cash flow.
Use Airbnb, Silvernest, or VRBO to rent out your basement, downstairs or an extra room. Meet some interesting people along the way. Sell extra stuff on Ebay, Craigslist, or your neighborhood Facebook page. (Just be sure to meet strangers at a neutral place.)
Start a side business. Consulting, freelancing, or starting a blog, podcast, or YouTube channel using your expertise and interests.
If you are able to make $500 a month at a side gig and only need to take out $2,500 a month (using our example), your money would last 30 years instead of 28 years!
3. Reduce expenses to take out less
So you worked longer, you make a little extra on the side. Now if you can reduce your income needs, your money will last even longer.
Consider a move to a place with a lower cost of living. For example, my husband and I moved from the beautiful but high-tax state of California to the equally beautiful but moderate-tax state of Utah.
Use a cost-of-living calculator to determine the true cost of living. For example, according to NerdWallet’s Cost-of-Living calculator, the cost of living in Madison, Wisconsin is 27% cheaper than San Diego, California!
Consider moving to a state with no income tax (just keep in mind the other taxes they may use to make up for it!). There are seven states with no state income tax — Washington, Texas, Nevada, Florida, South Dakota, Alaska, and Wyoming. Just be sure to check the total cost of living in those states.
Drastically reduce your overhead. Downsize to a smaller place or purchase a duplex and rent out the other side. Move into a “mother-in-law” cottage on your adult child’s property. Whatever you do, attempt to reduce the cost of your housing, which is often your largest expense.
Get fit and healthy to reduce medical expenses in retirement. Not only will you feel better, but you can save money on prescriptions, too.
The bottom line is there are several ways you can improve your retirement confidence. Save more by working a year or two longer, create income streams in retirement to draw out less, and reduce expenses as much as you can. Work with a financial planner to put strategies like these in place.
Your money can last much longer with just a few tweaks!
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