Running out of money in retirement

RUNNING out of money is a significant risk faced by retirees for several reasons. First, the increased lifespan due to health care advances means that many will live longer than anticipated, stretching their retirement savings over more years. In the 1980s, the average life expectancy of a Filipino was 62.5 years. By 2024, that number has increased to 71.8 years.

Second, inflation erodes the monetary value of fixed income, making it harder to maintain the same lifestyle. The purchasing power of P100 in 1980 has gone down due to inflation and what could be bought for P100 at that time would now require P1,800.

Third, unexpected medical expenses can quickly exhaust savings. Out-of-pocket expenses for critical illnesses such as cancer, stroke or cardiovascular diseases can easily exceed P1 million, especially in the absence of comprehensive health insurance. While PhilHealth provides some support, it is not enough to cover the full extent of these costs.

Additionally, market volatility impacts investment returns that can drain retirement funds. The PSEi has experienced a decline of about 11 percent from 2020 to April 2025 due to volatility, economic and geopolitical headwinds.

Last, inadequate planning or mismanagement of funds can deplete resources readily. Failing to save early reduces the opportunity to build a sufficient fund, while investing in overly conservative vehicles can hinder the growth of that fund over time. A 2020 Bangko Sentral ng Pilipinas report showed that 80 percent of Filipinos are financially unprepared for retirement.

These factors combined can increase the risk of retirees outliving their savings.

To reduce this risk and to properly address the above concerns, investing in stocks can be a valuable strategy prior and during retirement. Stocks have the potential to offer higher returns compared to fixed-income investments. Although not indicative of future results, on a 10-year period ending in 2020, the PSEi had an average annual return of approximately 8.5 percent, whereas Philippine government bonds yielded around 5.5 percent annually.​ Even though stocks can go up and down in the short term, they usually grow more over the long run. By including some stocks in a retirement portfolio, retirees give their money a better chance to grow, which helps it last longer and keeps up with rising costs. This helps protect against the risk of running out of money too soon.

However, it is important to remember that investing in stocks requires careful consideration of one's risk profile, life stage and the appropriate allocation of funds. Each retiree's financial situation and risk tolerance are unique, so it is better to consult a financial advisor who can help retirees arrive at a comfortable and effective strategy that aligns with their individual goals and circumstances. This tailored approach ensures that retirees make informed decisions, striking a balance between growth potential and security, ultimately enhancing their financial well-being and peace of mind during retirement.

It is important to acknowledge that investing in stocks also entails accepting market volatility as an inherent part of the process. When market fluctuations occur, it is crucial not to panic. Investors tend to react emotionally, and many may start selling their assets to avoid further losses, which can cause prices to drop even more. Others might see falling prices as an opportunity to buy at a discount, adding to the rapid back-and-forth in the market. For retirees, this kind of volatility can be especially risky because they may need to withdraw money during a downturn, potentially locking in losses and weakening the long-term health of their retirement savings.

To help prevent this from happening, retirees may benefit from using the bucket strategy which divides retirement savings into three parts, or "buckets," to match different time needs. The short-term bucket holds cash or safe investments to cover two to three years of living expenses, so retirees don't need to sell during a market downturn. The medium-term bucket is for the next three to 10 years and includes slightly riskier assets like bonds and dividend-paying stocks, offering some growth while still being relatively stable. The long-term bucket is for needs 10 years or more in the future and is invested in stocks or equity funds, aiming for higher growth to beat inflation and make savings last longer.

The bucket strategy helps reduce emotional decisions by giving structure and clarity to how money is used over time. By dividing savings into separate buckets based on when the money will be needed, retirees can feel more secure. With short-term needs covered, retirees are more likely to stay calm and stick to their plan, instead of reacting out of fear. Overall, the strategy brings peace of mind and encourages smart, long-term thinking.

A sample budget strategy for a P20-million retirement fund could be like this. The short-term bucket might hold P4 million in cash or in savings accounts, time deposits or money market funds to cover two to three years of living expenses. The medium-term bucket could have P8 million invested in relatively stable assets such as bonds, balanced funds or dividend-paying stocks to support needs over the next three to 10 years while offering some growth. The remaining P8 million would go into the long-term bucket, invested in higher-risk, higher-return assets like stocks or equity mutual funds to help the fund grow and keep up with inflation over time. This is just one example, and every retiree's situation is different. Factors like risk tolerance, lifestyle, health and income needs should guide how the strategy is applied. As mentioned, consulting a financial advisor can help tailor the approach.

The bucket strategy is a practical way to address the financial challenges of retirement. It reduces the risk of running out of money by separating savings into parts that serve different purposes — meeting short-term needs, providing steady income and enabling long-term growth. It also helps retirees avoid emotional, impulsive decisions during market downturns and ensures a more stable, flexible financial path. When paired with smart investment choices and personalized advice, this strategy can offer retirees greater confidence, security and peace of mind throughout their retirement years.

Source: www.msn.com