What Happens if You Run Out of Money in Retirement?

Last week I had a discussion with one of our members at Mazima Voluntary Individual Retirement Scheme who withdrew his National Social Security Fund (NSSF) benefits last year upon reaching the mandatory age of 55 years. He is still engaged in active employment but his worry is that the NSSF benefits have run out hardly after one year and he has no hope of getting near anywhere near what he got from NSSF. This article is intended for those who have not started saving for retirement as well as those whose retirement benefits may not be sufficient in retirement or those who are already in retirement and have run out of money.

Running out of money in retirement is a real dilemma for many as it exposes you to financial hardship and reduced quality of life. You may need to rely on family members for financial assistance, reduce your standard of living, or make significant lifestyle changes. Retirement is a period of leisure, self reflection, and pleasure, but it also requires individuals to handle their finances with great care. One of the retirees' most significant concerns is the possibility of running out of money.

This is an uncomfortable topic for many, but understanding the risks of running out of money in retirement is critical to avoiding financial hardship later in life.

To avoid this situation, saving for retirement, planning for retirement income streams, managing expenses carefully, and investing in a diversified portfolio are essential. Investing in a diversified portfolio simply means “not putting your eggs in one basket”. Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. 

The Risks of Running Out of Money in Retirement

Retirees face several risks when it comes to running out of money. One of the most significant risks is the uncertainty of how long they will need to rely on their retirement savings.

People live longer and will need more money to cover their expenses. With this in mind, there is a higher chance that retirees will outlive their retirement savings.

Another significant risk is the unpredictability of future expenses. Healthcare costs are rising rapidly, and retirees are particularly vulnerable to these costs. The potential consequences of running out of money in retirement can be severe.

Retirees who run out of money may be forced to rely on family members which brings a significant burden on family members and can cause emotional distress for the retiree.

Retirees may have to reduce their standard of living and make significant lifestyle changes, such as moving to a less expensive area or downsizing their homes.

Strategies for Avoiding Running Out of Money in Retirement

There are several strategies that retirees can use to avoid running out of money for retirement.

Starting Saving Early

You can avoid running out of money in retirement by starting to save as early as possible such that at retirement you have a significant amount of saving. This means making voluntary retirement contributions with Mazima Voluntary Individual Retirement Benefits Scheme, investing in collective investment schemes like Money Market funds, and taking advantage of employer-matching contributions.

Plan for Retirement Income Streams

The mistake many retirees do is to draw their retirement benefits in lump sum as this denies them a steady flow of income streams which are potential sources of retirement income. Annuity is a form of insurance entitling the investor to a series of regular (monthly, quarterly are monthly) payments over an agreed period of time. Many insurance companies in Uganda now offer this product but retirees should work with a financial planner to determine how much they can expect to receive from these sources and plan their retirement budget accordingly.

Manage Expenses Carefully

Managing expenses is crucial in retirement.

Retirees should create a budget and stick to it, avoid taking on unnecessary debt, and make lifestyle changes as necessary to reduce expenses. This may include downsizing a home, selling assets, or moving to a less expensive area.

Invest in a Diversified Portfolio

Investing in a diversified portfolio is another way to protect against the risks associated with running out of money in retirement. Work with a financial planner to determine the right combination of investments for a specific retiree's needs and risk tolerance is crucial.

Options if You Run Out of Money in Retirement

Despite careful planning, some retirees may still find themselves in a position where they need more money in retirement. If this happens, there are several options that retirees can explore to supplement their income.

Part-Time Work

Part-time work can provide additional income for retirees who want to continue working but cannot work full-time. This can also help retirees maintain social connections and a sense of purpose.

Downgrade to a cheaper Home

Downgrading may involve moving to a cheaper home and giving up your house for either renting or even selling it off to obtain the much needed money which could be used to buy an annuity. Some retirees may opt to move to rural areas where the cost of living is cheap and give up their city homes to earn them income.

Financial Assistance 

Retirees may be able to seek financial assistance from family members or government programs like the Social Assistance for the Elderly (SAGE). However you should note that the SAGE program is available to older persons aged 80 and above.

Conclusion

Running out of money in retirement is a serious concern that can have severe consequences for retirees. However, individuals can take steps to minimize this risk by adopting a proactive approach to retirement planning.

Strategies such as saving early and often, planning for retirement income streams, managing expenses carefully, and investing in a diversified portfolio can all help to safeguard against running out of money in retirement.

If retirees find themselves in a difficult financial position, options such as part-time work, downgrading to cheaper homes, and government programs may be available to provide some relief.

I encourage you to hire a retirement planning professional to ensure that you are well-prepared for retirement and take advantage of the many benefits professional financial advice offers.

A retirement professional can help you develop a customized retirement plan that aligns with your goals and risk tolerance so that you can enjoy a comfortable and stress-free retirement.

Daniel Wilson Alifaki

Chairperson, Maxima Voluntary Individual Retirement Benefits Scheme 

0775968241