15 Ways to Never Run Out of Money

Savings, investment, and lifestyle strategies for all ages.
The American economy may be moving like molasses in January, but have no doubt, it is moving. Between late 2008 and 2010, the Standard & Poor's 500 index rose in healthy double digits to the point that many investing stalwarts who stayed in stocks recouped the money they'd lost in that period, and then some. The national savings rate -- income minus taxes and household expenses -- rebounded from a negative number in 2006 to almost 6 percent in October 2010, according to the U.S. Bureau of Economic Analysis.

For many, the economic recovery isn't so much crawling as stalling. But regardless of the state of your finances, now is a good time to begin planning a future that's secure. That means creating a plan to ensure you don't run out of money in the near term or far in the future. And paradoxically, it may mean creating a lifestyle that doesn't place money at its core.

When the Consumer Reports National Research Center recently surveyed 24,270 online subscribers age 55 and up about their finances and satisfaction with their lives, we found some common keys to peace of mind that had little to do with big salaries or high living. They pointed to active steps they'd taken as well as pure luck: enjoying good health, planning ahead, maximizing savings, having hobbies and friends, and staying in a job with a defined-benefit pension, which provides a regular income in retirement for life.

And when we interviewed several survey respondents as well as younger workers still in savings mode, we found another common element. A number mentioned living within, and sometimes below, their means. "Most of our entertainment is with friends and neighbors," said Vernon Chestine, 68, a Charlotte, N.C., retiree who participated in our survey. "I feel really fortunate to be in the position we're in."

In this report, we offer 15 ways to ensure you don't run out of money on your way to personal satisfaction, while you work and after you retire. Our survey respondents and the people we profile on these pages demonstrate their "best practices" that anyone can emulate. Employing just a few of them can pay off big-time in the long run.

Do You Need a Pro?
Among pre-retirees who had consulted a financial planner within the 12 months ending in October 2010, 67 percent reported gains in their retirement accounts during that period. But among those who hadn't met with their planner recently, 59 percent saw investment gains. And 57 percent with no planner experienced gains as well.

Indeed, our survey showed that saving more money and investing more in retirement accounts had the greatest payoff during the period, planner or no planner.

Starting Out
The habits you establish early in life can have a positive impact on your finances.

1. Live Modestly
For those millions of Americans currently out of work or underemployed, that is not a choice. But even when times improve, living within your means has its benefits. Retirees in our survey who were most satisfied with their situation credited living modestly as among the best steps they'd made earlier in life. "Since we never were extravagant people, we live just fine," says Pancho Garcia, 67, of Mebane, N.C., a retiree who participated in our survey.

And self-control has its rewards. Mary-Jo Webster, 39, and her husband, Jamey, 37, bought a house four years ago in Arden Hills, Minn., that was significantly smaller and less expensive than what they could afford. And they resolved to try to live on just one income. That decision paid back with interest when Jamey quit his job in computer technology to stay at home with their twins, Benjamin and Madeline, 2.

2. Keep to a Budget
As the Websters and other young couples we interviewed found, financial discipline is essential. Ensuring your money will last your lifetime begins with knowing how to make your paycheck last the month.

Toward that goal, create a basic spending plan or budget. At its simplest, a budget involves splitting your expenses into have-to's and want-to's, and paying the have-to's first. Start with tracking your spending for a couple of months. You can use free budgeting applications on websites such as Mint and Google Docs, or a pencil, paper, and a calculator. Setting some short- and long-term spending goals may make it easier to stick to your plan. Include payments into an emergency fund until you have at least enough for six months of household expenses set aside.

3. Start Saving Early
Retirees who began saving and planning early -- say, in their 30s -- had greater net worth: $1.1 million on average, compared with $868,000 for those who waited until their 40s, and $651,000 for those who started later, our survey found. Thirty-nine percent of retirees said they regretted waiting to save.

Most young workers today don't have access to traditional, defined-benefit pensions funded by employers, so they have to put enough money away during their careers to generate a comparable income stream. To do so, they need to take advantage of options offered by their employers. A growing number of employers automatically enroll new workers in a 401(k) or other retirement savings plan, typically deferring 3 percent of pretax income into a mutual fund targeted to an expected retirement date. The good news: Most new workers don't opt out of contributing once they're automatically enrolled. The not-so-good news: They also don't raise that contribution beyond the initial 3 percent. For the best results, they should eventually boost their deferrals to at least 10 percent of their income.

The young workers we interviewed appear to be heeding that message, contributing at least enough to their retirement accounts to earn the free money their employers offer in matching contributions. And the benefits of the Roth version of IRAs, 401(k)s, and 403(b)s are gaining attention. If you're single and under 50, and your modified adjusted gross income is less than $120,000 (less than $177,000 for couples filing jointly), you can put up to $5,000 of after-tax income into a Roth IRA and avoid any additional federal tax on that money and its gains if you have the account for five years and wait until age 59 1/2 to begin taking it out. It's a potential boon for lower-income earners who fall into low tax brackets now but may face much higher rates when they retire.

Young, on a Budget, and Planning Ahead
After racking up $8,000 in credit-card debt two years ago from their wedding and a move to Portland, Ore., Claire and Chris Angier, both 30, started tracking their expenses. Claire, a teacher, and her engineer husband follow a simple plan: They put aside money in their bank account toward debt, rent, utilities, and other essentials, and split a set amount to spend as they like. Using cash rather than credit for discretionary spending helps keep them on track. "You physically see the pile getting smaller," Chris says.

The Angiers apply discipline to their leisure pursuits -- he's a marathon runner and she teaches exercise classes -- and to their finances. Chris puts 11 percent of his pretax income into a 401(k) plan, reaping a generous company match. Claire, who's eligible for a pension, puts 5 percent into a 457 retirement plan. They're whittling down their educational debt while paying off a higher-interest car loan. And they're building equity in a rental property in Syracuse, N.Y., purchased on the cheap during their grad-school days.

They frequently discuss their finances. "Talking about money is not a taboo subject," Claire says. No doubt that will help when they welcome their first child this spring. "I think we'll continue to budget," Claire says. Chris adds, "It's a habit now."

The Middle Years
In this age range, roughly late 30s through mid-50s, workers have the potential to earn the bulk of their income. But they also face the competing challenges of putting away money for retirement and funding their children's college educations. Our survey results point to some useful strategies:

4. Diversify Your Holdings
Having a variety of investments -- stocks, bonds, and real estate, among others -- correlated highly with net worth in our survey, regardless of income level. Retirees with seven or more types of investments had an average net worth of $1.4 million. Those with three or fewer had an average net worth of $678,000.

For the average investor, whose savings are mainly in an employer-sponsored retirement plan, diversification means spreading that money among a broad mix of stocks and bonds. Index mutual funds typically have low costs -- a key positive factor in overall performance, says a recent study by Morningstar, the Chicago-based investment research company.

5. Prioritize Retirement Over College
You can borrow money for a college education, but you can't borrow toward your retirement. So while it's fine to start a 529 savings plan for your kids, make funding it a secondary goal.

"Our philosophy is to ensure our retirement savings first," Mary-Jo Webster says. But the Websters expect to have their house paid off by the time their 2-year-olds are ready for college. So then, they'll channel the mortgage money toward tuition.

Speaking of education, consider paying your child a regular allowance, either for chores or good behavior, to help teach budgeting and saving skills. Children who are self-sufficient in money matters could very well be less likely to pose a financial burden to their parents.

The Middle Years: Discipline and Diversification
Mike and Miriam Risko understand harmony. As performers and owners of a music school and store in Ossining, N.Y., the couple, in their early 40s, have been playing off each other's strengths for 20 years. Together, they built a one-person school into an operation employing 30 part-time music teachers.

The Riskos, married 10 years, put a healthy portion of their annual income into a profit-sharing plan. In 2009 they bought the building that houses their business. "They had the good sense to do this early," says Camille Cosco, a chartered financial consultant who has steered the Riskos' savings into a well-diversified mutual fund portfolio.

The couple learned how to stretch their money at a young age. Mike paid his way through college playing guitar. At 22, Miriam, a singer, started to save up to half of each paycheck. A small inheritance she received a few years ago went to a 529 college savings plan for their son, now 7. A 529 plan for their daughter, age 4, is on the to-do list.

Miriam acknowledges the challenge of passing on their money sense. "My son has a piggy bank with all of his change in it. Recently I said, 'Let's open a bank account. You'll get interest!' He said, 'You're not taking my money!'" she says with a chuckle. "We're still working on the piggy bank right now."

Pre-Retirement
From their mid-50s on, many people grow concerned about the adequacy of their savings. The pre-retirees we surveyed, most between 55 and 65, were generally less confident about their prospects than the retirees and those who had retired but still worked part-time. Although 44 percent said they were better off than they were a year before -- and those numbers have gotten better since 2008 -- about one-fifth of pre-retirees said they were worse off financially than they had been a year before. That said, there's still hope if you're behind. Here are some ways to improve your strategy.

6. Stay in the Game
A Fidelity Investments study of the balances of its 401(k) participants age 55 and up found a real benefit to perseverance. Those who continuously contributed to their plans doubled their average account balance in the 10 years ending the third quarter of 2010, which included the financial fiasco of 2008 and 2009.

To be sure, some two-thirds of the doubling in value came from contributions from savers, not from their investments' appreciation. But so what? Those investors are twice as well off in nominal dollars than they were a decade ago, and much better off than people who tried to time the market -- those who sold their stocks during the panic and missed out on a precipitous rise in value that followed.

You should periodically assess your asset allocation -- how your money is divided among stocks, bonds, and cash. As you age, you might want to move more of your assets into less-risky investments. Vanguard founder John Bogle advises that the percentage of your portfolio allocated to bonds and cash should equal your age.


28 Percent
That's the percentage of partly retired survey respondents who said they were highly satisfied with their retirement planning. Only 21 percent of those not yet retired said they were highly satisfied with their planning.

7. Catch Up
Retirees who said they were highly satisfied counted maxing out contributions to an employer-sponsored retirement plan among their best steps. Once you're free of college-finance and child-rearing costs, put the extra savings there until you max out. In 2011 the limit for pretax contributions is $16,500 a year, plus another $5,500 in catch-up contributions for those 50 and up.

8. Pay Off Debt
Accelerate payments on your mortgage with an eye toward paying it off by retirement. That might seem counterintuitive, given the past year's stellar market performance, when putting extra cash in the S&P 500 would have provided a better return. But given the market's ups and downs, that strategy can backfire; just as you're ready for retirement, you could be stuck with losing investments and a mortgage still to be paid. Besides, our survey found a correlation between satisfaction in retirement and lack of significant debt. Nonetheless, an alarming 39 percent of retirees still had at least $25,000 in mortgage debt.

9. Budget for Health-Care Costs
Even with Medicare coverage, expect to pay a significant amount out of pocket for health care. Fidelity Investments published a study last year showing that the typical couple retiring in 2010 would incur $250,000 in health-care costs during their retirement years, outside of their Medicare benefits.

That incredible figure isn't so wild when broken into components: annual premiums for Medicare Parts B and D; deductibles and co-insurance for Medicare Parts A and B, plus cost sharing for prescription drugs; and benefits not covered by Medicare, including eyeglasses, contact lenses, hearing aids, and private-duty nursing. Those figures represent a national aggregate figure, so costs in some regions could be higher.

And that number doesn't take into account the cost of long-term care. To research average costs in your area, go to the National Clearinghouse for Long-Term Care Information and click on "Cost of Care." That cost is not covered by Medicare or other health plans. If you expect your assets in retirement to be under $300,000 (not including your home), you probably can't afford long-term-care insurance, though you might qualify for government help should you need long-term care. If you think you'll have more than $2 million, you can probably afford to pay for your own care, if needed. Those in between might want to consider a long-term-care insurance policy, though be aware that those policies are expensive and complicated.

10. Time Your Payout
Opting to receive your first Social Security check at 62, the minimum age, reduces your payout. Someone born in 1954 who decides to retire at age 62, for instance, would get 25 percent less than he or she would get by waiting until the full-retirement age of 66. If you're tempted to begin your benefits early, be aware that each year you delay, up to age 70, earns you up to 8 percent more in income depending on your age, a respectable guaranteed return.

Pre-retirement: Research and Perseverance
Ken Ranlet started from scratch on his retirement plans after his divorce at age 44. Now 59, Ranlet, of New Fairfield, Conn., feels fairly certain he can retire by 65 in comfort.

How is that possible? Part is luck. The multinational company he's worked for over the past 15 years offers both a 401(k)-like retirement plan and a defined-benefit pension. But Ranlet, who has two grown sons, also saves diligently, lives modestly, and uses every resource offered him. He has always put at least 7 percent of his salary into the company's retirement plan to nab the 50 percent match. When he finished paying his sons' college tuition, he upped his retirement plan contributions to max out. He added the annual "catch up" for those over 50 "the minute I could take advantage of it," he says.

Ranlet also educated himself about diversification, sparing himself some of the losses that many experienced in the 2008-'09 market plunge. "I tried to spread the money around: some international, some short-term bond funds, some long-term bond funds," he says. To plan retirement, he interviewed his parents, in northeastern Pennsylvania, and his aunt and uncle in Syracuse, N.Y., about their retirement lifestyles. Their experiences helped him to "benchmark my own tastes and expectations," he says.

And what are those expectations? A home in less-costly upstate New York, with room for company and his model train sets, and a big woodworking shop in the basement. "I don't live to drive a Maserati. I don't feel I need to take a superfancy cruise," he says. "I can enjoy a week at the Jersey shore just as well. I don't have to have the latest and greatest as long as what I have is serving my needs."

Retirement Years
One element pervades our happy retirees' responses: a pension. Having steady money coming in each month was a common factor in retirees' satisfaction, whether their net worth was $250,000 or more than $1 million. But our survey found that pre-retirees are less likely to have a pension than current retirees.

Sensing a growing market for guaranteed income in retirement, financial companies have invented products and adapted old ones to offer guaranteed income and protect against "longevity risk," the threat that you'll outlive your money. Here are some considerations.

11. Tread Carefully With Annuities
Our survey respondents mostly shied away from annuities, investment-based insurance products that guarantee lifetime income. Only 2 percent of working people and 1 percent of retirees named buying an annuity among the best steps they had taken toward or in retirement. Among the possible concerns: high management fees, stiff sales commissions, and the potential loss of cash value if you die prematurely.

But a new type of deferred annuity called longevity insurance holds some promise for those concerned they'll live beyond their assets. At retirement you pay an insurer a lump sum. Years later, typically at age 85, you begin to receive to a fixed payout. Because you're not paying for as many years of coverage, you don't have to invest as much in these products as you would with an annuity that starts its payouts earlier. Jason Scott, managing director of the Retiree Research Center at Financial Engines, an online personal finance service, projects that a 65-year-old retiree putting about 11 percent of his assets into longevity coverage and the rest into zero-coupon bonds -- which pay all their interest at maturity -- would have 34 percent more money to spend during the subsequent two decades than if he had invested only in the bonds.

12. Follow the 4 Percent Rule
Withdrawing 4 percent annually from your retirement funds has been shown to preserve your capital for at least 30 years in even strained economic environments, assuming you rebalance regularly. In recent years, some economists, including Nobel laureate William Sharpe, have attacked the 4 percent philosophy as inefficient and potentially costly to retirees. Still, many financial advisers hew to it because it's simple to understand.

New mutual funds, called managed-payout or income-replacement funds, attempt to provide investors with a regular payout while leaving the decisions about what to liquidate and rebalance to a fund manager. On the downside, payouts for such funds aren't guaranteed, because they're based on how well the fund does.

Because managed-payout funds are relatively new, their performance is hard to judge. But the Consumer Reports Money Lab recently analyzed how well the components of one such family of funds, the Vanguard Managed Payout funds, had performed. If you had invested in them and then withdrawn your money at rates of 3 percent or 5 percent a year between 1989 and the end of 2009, your holdings would still have grown. Even a 7 percent payout would have basically held its own. Our Money Lab conclusion: The 4 percent rule protects disciplined investors in a variety of circumstances, whether they buy a managed-payout fund or manage their funds themselves.

13. Fill Up a Big Bucket
An intuitive way to manage your portfolio is to put your money into "buckets" depending on when you might need it. In a simple version of this approach, the first bucket should hold enough cash to cover two years of living expenses. The first year's portion should be liquid, say in a bank account or money-market fund. The second year's expenses can be invested in a ladder of CDs or short-term bonds (one- to two-year maturities). Money for a special purpose within five years -- say, a car or vacation -- should be kept in a separate account.

A second bucket can hold short- to intermediate-term bonds and funds. A portion of the bond bucket, say, one-third, can be in a short-term bond ladder, which can serve as an additional emergency fund and generate cash to draw from. With this approach, even in an emergency, "you won't be forced to sell at the bottom of the market," notes Harold Evensky, a certified financial planner in Coral Gables, Fla.

In your second bucket, also include a diversified intermediate-term bond fund or include a mix of attractive corporate and municipal bonds. The remaining third of the second bucket can include Treasury Inflation-Protected Securities, or TIPS.

Your third bucket can hold stock funds and up to a 5 percent stake in commodities, such as a gold exchange-traded fund. As you get into the later stages of retirement, the returns that you earn from stocks can be funneled back into a growing cash-and-bond allocation.

14. Hedge Against Inflation
If you lived through the '70s and early '80s, you can attest to the corroding power of inflation. To protect yourself in retirement, continue to invest a portion of your money in stocks and devote 5 to 10 percent of your money to TIPS and I-Bonds. You can buy TIPS, which have maturities of five, 10, and 30 years, from the U.S. Treasury; a bank, broker, or dealer; or through a mutual fund. I-Bonds are also sold by the Treasury, and at banks and credit unions. When inflation heats up, TIPS grow in value, throwing off more income. I-Bonds pay both a fixed rate of return and a variable inflation rate. As a bonus, interest on I-Bonds and TIPS is exempt from state and local income taxes.

15. Work Longer
Twenty percent of our survey respondents worked part-time in retirement; 37 percent of that group said they needed the income. But the psychic benefits of continued employment also were important to many. More than half said working made them feel useful; 38 percent said they enjoyed work too much to give it up.

In spite of being employed part-time, 45 percent of semi-retired workers under 65 were already collecting Social Security benefits. That's often not a wise choice for those below full retirement age. For every $2 you earn above $14,160, Social Security deducts $1 from your benefits. Once you reach full retirement age, you're entitled to all your benefits, regardless of how much you make. For more information on how Social Security calculates those benefits, check out ssa.gov/pubs/10069.html.

Retirement: A Few Earned Niceties
"We've played it pretty tight all these years, and now we're reaping the benefits," says Daniel Dittemore, 68, about his current lifestyle with his wife, Betsy, 67. With their savings and pensions paying out, the retired couple from Ankeny, Iowa, are enjoying the storied fruits of retirement: time and money to visit their children and grandchildren, a couple of nice vacations abroad, country club membership. Add to that golf, volunteer work, card games, and exercise.

"Most of the steps we've taken are things that any normal person thinking about retirement thinks about," Betsy says. That includes maximizing their 401(k) contributions while they worked and paying off their mortgage. But the couple also lived for years "not within our means, but beneath," Betsy says. They started raising their two daughters in a small, three-bedroom house with one bath and eschewed big purchases like the boats and RVs that sat in their neighbors' driveways.

And in what Daniel called a conscious choice, they chose public-sector jobs known to pay less but provide security later. He served as an urban planner for years, mainly for local governments. She worked part-time in administrative roles, rising to full-time legislative liaison for a state agency.

"Frankly we probably wouldn't have the lifestyle we have if we didn't have pensions," Betsy says. But, Daniel adds, they earned them.

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