Strategies To Retire Without Running Out Of Money

Nearly two in three Americans (64%) are more worried about running out of money in retirement than they are about death, according to the 2025 Annual Retirement Study from the Allianz Center for the Future of Retirement. As one might expect, exhausting funds without the recourse of youth or the remedy of an income-driven career can generate anxiety.

However, knowledge can be a useful tool, and the more individuals understand about their retirement needs, the less intimidating the prospect may become. A simple yet powerful method for estimating how much money one requires to retire with peace of mind and how investments may contribute to achieving that amount is a strategy called Fill The Gap, or FTG.

Fill The Gap: Three Simple Steps

1. Figure out income.
   1. Start by identifying all guaranteed income sources, such as Social Security, pensions, rental income, or annuities.
   2. Adjust these numbers for taxes. A retiree taking home $4,000 per month from Social Security and $1,000 per month from a pension has a total guaranteed income of $5,000 per month.
2. Figure out monthly spending.
   1. Tally all monthly expenses. There is no wrong way to do it. An Excel spreadsheet, Quicken, or even a pencil and paper will suffice.
   2. In this example, stipulate that the total monthly expenses are $8,000.
3. Find the gap.
   1. Subtract take-home income from spending needs. Using the example above: $8,000 (expenses) – $5,000 (income) = $3,000 gap per month.
   2. This $3,000 gap needs to be filled using investments. Keep in mind that it must be adjusted periodically to account for inflation and changing spending habits.

How Much To Fill The Gap: The 25x Rule Of Thumb

Now that the gap size has been assessed, determine how much in liquid investments would be required to cover it. Use the 25x Rule of thumb as a guideline. Start with the gap amount, in this case $3,000. Next, multiply that number by 25 to find the total savings goal.

The 25x Rule of thumb is simply the inverse of the widely utilized 4% Rule of thumb, which helps determine how much money can be withdrawn to adequately fund monthly expenses without depleting the nest egg. In other words, how to max out a retirement lifestyle without running out of financial resources. In the example used:

• $3,000 monthly = $36,000 annually.
• Applying the 25x Rule of thumb: $36,000 × 25 = $900,000
• Therefore, $900,000 in investments is required to generate the necessary withdrawals without hemorrhaging retirement funds.

How To Generate Income From Investments

Creating a portfolio that balances both income and growth has worked as an effective fill the gap strategy for many happy retirees.

• Income Side—target a 4% yield from dividends and interest, pulling cash flow from investments such as:
  • Dividend-Paying Stocks
  • Exchange-Traded Funds (ETFs)
  • Bonds
  • Real Estate Investment Trusts (REITs)
  • Master Limited Partnerships (MLPs)

Many investors have achieved yields of 3.5% to 4.5%, generating cash flow that helps offset expenses without eroding the principal too quickly.

• Growth Side—based on past performance, estimating 2% to 4% annually from stock market appreciation and overall economic growth is not unrealistic. While these results can fluctuate, it has typically been an achievable long-term return.

Nothing is guaranteed and investments may not perform as they have in the past, but the overall goal is an annual return in the 6.5% to 7.5% range.

Accounting For Taxes In FTG Calculation

A critical factor many retirees overlook is how taxes might change in retirement. Often, they see their effective tax rate drop significantly, sometimes falling to half of what they paid during their primary working years. Why? There are a few possible reasons:

• Social Security income is often only partially taxable.
• Taxable income can be controlled through strategic withdrawals from pre-tax accounts.
• Without payroll taxes, retirees often experience a decrease in their overall tax burden.

Because of this potential dynamic, it’s often more constructive to calculate FTG numbers using after-tax figures.

Does FTG Work For Everyone?

While every retiree’s financial picture is unique—whether they have a pension, own a business, or manage different spending levels—the FTG method tends to be universally applicable. Regardless of variables like marital status, investment comfort levels, or spending habits, the fundamental math remains the same: identify a gap and create a plan to fill it.

Using the FTG method to assess targets can highlight the importance of understanding real-life expenses when planning for retirement. Everyday costs add up quickly, and having a clear financial checkpoint helps ensure that both necessities and indulgences can be covered. Why indulgences? Because if a retirement isn’t fulfilling, what was the point of the hard work it took to create it?

The Bottom Line

By using the FTG strategy and the 25x Rule of thumb, much of the guesswork can be removed from retirement planning. Instead of worrying about dwindling financial means, a clear, numbers-driven roadmap can proactively facilitate savings and investments to help empower financial security and happiness.

Retirement should be a time to enjoy the fruits of labor, not labor over assets bearing enough fruit. Knowing the size of the gap—and how to fill it—can bolster peace of mind and foster a purposeful retirement.

Disclosure:

The 25x rule is a general guideline and doesn’t account for all factors, such as potential investment returns, inflation, healthcare costs, or long-term care needs. It’s important to use it as a starting point and consider your individual circumstances and needs. 

The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Investment decisions should be based on individual financial needs, objectives, goals, time horizon, and risk tolerance. Individual results will vary based on market conditions, timing, tax circumstances, and portfolio customizations. There is no guarantee that any investment strategy discussed herein will work under all market conditions. Past performance does not guarantee future results.