What to Do When You Outlive Your Retirement Funds

NEW YORK (MainStreet) — The idea of retiring comfortably has become the new American dream for many households, but all too often it’s a dream that doesn’t come true.

In what may be the most depressing study to come out in recent memory, researchers from MIT, Dartmouth and Harvard found that nearly half of retirees had less than $10,000 in their retirement savings plans the year before they died and 55% had less than $25,000. To make matters worse, many of these people had no home equity to speak of either.

The report, published this month by the National Bureau of Economic Research, reaffirms a point that many financial advisers have been hammering for years: Americans do not set aside nearly enough money and investments to last through their retirement. The result is that many retirees find themselves broke or close to it in their final years.

Much of the reason for this, according to Jean Setzfand, AARP’s vice president for Financial Security, is that about half of today’s retirees assumed they could rely solely on Social Security as a source of income and so they didn’t get into the mindset of saving for retirement. These are most likely the 46% of retirees who passed away with less than $10,000 in savings. The other half, she says, were the ones fortunate to be covered by pensions. Unfortunately, the dynamic may not be much better for those who have yet to retire.

“Only about half of workers are covered by employers from a retirement benefits standpoint. That hasn’t changed,” Setzfand says. What has changed, she says, is that those retirement programs are now more employee-driven (meaning 401(k)s) rather than employer-driven (meaning pensions). “I’m not sure that we are in a better position. If you look at the numbers on how much people have saved for themselves – the numbers aren’t great.”

Indeed, one survey put out by Wells Fargo last year found that 29% of workers in their 60s had saved up less than $25,000 for their retirement even though they expected that money would have to hold them over for more than two decades. When you combine those anemic savings with the fact that people are living longer and the ever-increasing cost of prescription drugs and treatments, it’s little surprise that so many would come close to running out of money later in life.

There are plenty of steps workers can take to prevent this from happening before you retire, as several financial planners we spoke with were quick to point out. These include everything from re-allocating some of your funds into riskier investments, working a few extra years if your health permits and delaying collecting your Social Security benefits until you’re closer to 70.

For those who are already retired and in danger of running out of money in the near future, though, there are fewer options available and most tend to be more extreme. Still, these may be your best bet to avoid going completely broke in your old age.

Cash Out Your Life Insurance Policy

Even those with little to no money saved up for retirement may have another cash reserve they forgot about: their life insurance policy.

“If you have cash-value insurance policies, turn them in. You probably don’t need the insurance anyway,” says Frank Boucher, a certified financial planner with Boucher Financial Planning Services. Those in dire straits have the option to trade in the entire policy for its cash value or borrow some money back, thereby reducing the total death benefit one would get. 

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