Retirees Who Do This With Their Savings Could Run Out of Money Years Sooner

Those retiring soon like to frame their savings as a number to beat rather than a more nuanced strategy for saving, investing, and spending. Some even keep a large amount of money in cash and hope it may protect their nest egg from market fluctuations.

However, a successful retirement plan isn't all about how much you have. It also depends on matching money to your time horizon and lifespan. Learn about this costly mistake seniors commonly make and how it could leave you with less to live on in the long run.

Why cash may be a trap

Liquid cash has a place in retirement, as it's easy to spend and could be great for short-term, ordinary budget needs. However, it rarely grows fast enough to keep up with rising costs, so it loses purchasing power over time. It goes from being safe to less useful and could even put you in danger of running out more quickly than planned.

Simply put, cash isn't designed to fund decades of living expenses. You must invest it wisely for it to offer the returns you worked so hard for.

The withdrawal mistake to avoid

So, what makes you run out of money too soon? It happens when you use your nest egg for a series of random withdrawals without much of a spending system.

Financial professionals often recommend a structured withdrawal rate based on income needs, portfolio mix, and retirement length. This works better than taking cash out every time a bill comes due.

The 4% rule (taking out 4% of your portfolio each year) is just a guideline and isn't universally appropriate. The bigger picture is to focus just as much on how and when money comes out, rather than just your account balance.

Why early losses hurt more

The 8-12% market returns quoted by finance experts only tell part of the story for retirees. Sequence-of-returns risk may matter even more. This is a concept that describes when you get returns on your investments and how they affect your overall portfolio.

For example, market drops early in retirement, paired with withdrawals, could make it too hard for the portfolio to recover to its original principal balance. So, there's less growth over the life of the retirement accounts, even if the market later rebounds.

Retirees need a cash buffer they are able to dip into if the market drops, so they aren't tempted to sell investments and permanently limit their portfolio.

How inflation makes it worse

There's another factor to consider beyond market performance. Inflation is a given, yet how much it affects a portfolio depends on market conditions. Even modest inflation chips away at buying power, so a fixed cash balance becomes less valuable over time. Add in the problems that occur with early market losses, and well-planned spending rules quickly become outdated for the new conditions.

This is especially risky for those with too much in low-yield or cash accounts. The money that seems secure at first is now unable to stretch as far. You must remember that retirement money has two jobs: cover today's expenses and preserve tomorrow's purchasing power.

How to build a safer money bucket

Fortunately, there's a practical fix. Retirees could reduce the risk of running out of money by keeping enough liquid or low-volatility assets for near-term needs and putting the rest in portfolios with higher growth.

Some experts recommend having three years of living expenses in liquid funds, including fun money, while others recommend up to five years for a safer bet. This is clearly a range that you could use to guide your own decisions. Your ideal cushion would balance your risk tolerance and unique spending patterns.

The quick spending checkup to do now

Since short-term bills drive that cash reserve, it could be tempting to underestimate what you'll need. But the goal isn't to make yourself feel deprived. Add up fixed costs, variable expenses, and occasional large splurges to compare against guaranteed income sources (like Social Security).

If your spending number is too high, look to cut from subscriptions, travel, and unnecessary housing costs before assuming you'll need more cash reserves to live on.

Bottom line

Retirees don't often run out of money because of one catastrophic mistake. It's more common to allow a pattern of small spending decisions and low-growth savings to stall out your nest egg's momentum. Put too much in cash, and you won't out earn the cost to live. But too small a cushion may have you selling off stocks.

At a minimum, be honest about inflation numbers and market conditions. The safest retirement plan doesn't require keeping everything in cash, but it does require you to know your real short-term cash number so the rest could grow for you.

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