If you don’t want to outlive your money in retirement, then you’ll need a plan to make your money last for the rest of your life, no matter how long you live. Otherwise, you’ll need to count on hope and luck, which isn’t very smart.

Your plan includes these steps:

  • Satisfy the common-sense formula for retirement security: I > E, or income greater than living expenses
  • Continue investing throughout retirement
  • Build and manage an emergency fund

Let’s look at each of these steps in detail.

How Should You Manage Your Expenses In Retirement?

Here’s the first thing to remember: Don’t spend your savings in retirement! You might think this doesn’t make sense—isn’t that what retirement savings are for?

Many people who use their retirement savings as a checking account to pay for living expenses are spending too much; as a result, they’re on a path to outliving their money.  Instead, consider that most of your savings will generate monthly retirement paychecks that last for the rest of your life. Then, spend no more than your monthly paychecks, in combination with other sources of lifetime income such as Social Security, pensions, and any annuities that you might buy. When you manage your spending this way, you won’t outlive your money.

Once you know how much lifetime retirement you have from all sources, you have a target for the total amount of living expenses you can afford to pay. You’ll want to inventory all your living expenses, both regular monthly expenses and expenses that are paid infrequently, such as property taxes and homeowner’s insurance. Separately itemize your “must have” living expenses from your “nice to have” expenses.

If your total living expenses are greater than your total monthly income, then you’ll need to reduce your living expenses. Your first targets for reducing spending might be your “nice to have” expenses, which in theory you could reduce if necessary. However, there could be large “must have” living expenses that you could reduce, such as downsizing to reduce your housing expenses.

How Should You Manage Your Income In Retirement?

 You’ll want to build a diversified portfolio of lifetime retirement income, including Social Security, pensions if you have one, and the monthly paychecks you generate from your retirement savings. There are three ways you can use your savings to generate lifetime paychecks:

  • Develop a plan for investing your savings and using a careful plan for determining the amount of your retirement paychecks, aka “systematic withdrawals.”
  • Buy a lifetime annuity or guaranteed income product from an insurance company.
  • Use a portion of your savings to maximize your Social Security income, aka a “Social Security bridge fund.”

When building your retirement income portfolio, you’ll want sources that are protected against investment losses, such as Social Security, pensions, and annuities. Consider building enough risk-protected retirement income to pay for most, if not all, of your “must have” living expenses. This way, you won’t need to move in with the kids if the stock market crashes.

Then consider using your retirement paycheck that’s generated by systematic withdrawals from investments to pay for your “nice to have” living expenses. In theory, you could reduce these expenses when the stock market crashes.

Here’s a common trap to avoid: Don’t rely on income from working to pay for your “must have” living expenses. At some point in the future, you’ll no longer be able to continue working for pay. A better approach is to use income from working to pay for “nice to have” expenses. which you could reduce when you no longer have income from working.

How Should You Manage Your Investments In Retirement?

You’ll want to coordinate your investment strategy with your plan for generating monthly retirement paychecks. If you have enough risk-protected retirement income to cover your “must have” living expenses, then you could consider investing significantly in the stock market with your remaining savings to help protect against inflation. However, you’ll want to understand and be comfortable with the investment risk that you’re assuming.

For most retirees, low-cost stock index mutual funds or exchange traded funds (ETFs) can be a straightforward and effective way to invest in the stock market.

How Should You Manage Your Liquid Savings In Retirement?

You’ll also want to maintain a liquid emergency fund that you can quickly tap to pay for unexpected living expenses that you can’t afford to pay from your monthly retirement paychecks. This fund would be different from the investments mentioned above that are generating a monthly retirement paycheck.

To determine the amount of your emergency fund, you don’t need to rely on the conventional rule of thumb of three to six months of salary; this rule protects against job losses, which you’ll no longer have in retirement. Instead, consider an amount that can pay for expense surprises in retirement, such as house or car repairs or uninsured health bills such as dental expenses.

Why Is It Important To Have A Money Management Plan In Retirement?

The steps described here may be a lot of work. However, the sooner you balance your living expenses with your retirement income, the better your long-term finances will be. Your plan will help you enjoy your retirement years and reduce any stress you may have about your money. Make a smart plan to support the life you want in retirement, and then go live it up!