One of the top questions I hear and read about is some version of, “how long will my money last?” In most cases, people are concerned about running out of money in retirement.

With so many people retiring early these days, it's a legitimate concern. Money doesn't need to last longer because we're retiring at younger ages. That's only part of the story. We are also living longer than at any time in history.

According to the Centers for Disease Control (CDC), the average life expectancy for Americans born in 2017 is 78.6 years. Men's life expectancy in 2017 is 76.1. Women averaged a five-year longer life expectancy at 81.1 years.

Those aged 65 in 2017 are expected to live another 19.5 years (age 84 1/2). For men, it's age 83 and women age 86. I've seen other studies project that at least one spouse at age 65 has a 45% chance of living until age 92. That means our money and income have to last a lot longer than in years past.

Here's a chart from the CDC study I referenced.

How Long Will My Money Last – Life Expectancy

It's more important than ever to prepare for a living a longer life. But how do you know what age to use? That's a great question. My suggestion is to plan to live until at least age 90. That may sound crazy. Here's my reasoning.

If you plan for a shorter life expectancy and set up spending based on that, how will you adjust if you live longer? What will you cut back?

One of the biggest mistakes retirees make occurs when we underestimate the cost of health care in retirement. Remember, the average health care expenses in retirement range from $250,000 – $350,000. I'm not talking about total costs here. These numbers represent out of pocket expense retirees pay. We incur the vast majority of those expenses in our later years of life. If you planned on not being around that long and set up spending accordingly, Where will the money come from to pay for health care and any other unexpected expenses?

On the other hand, if you plan for a longer life expectancy, set up spending accordingly by cutting back expenses and lowering the budget, you'll have a better chance of not running out of money.

To help you think about ways to make your money last longer, here are five things you can do today to get started.

1. Reduce Spending

Listen, this may sound crazy simple as you read. It may not apply to you. However, you'd be surprised at how many people live beyond their means. Overspending is the #1 problem with creating wealth. If you spend more than you make, you'll never have enough money. And you'll have a bunch of consumer debt because you've financed your lifestyle. If that describes you, take action now. Get on a debt reduction plan and stick to it.

Have a Budget

Another thing that may seem super obvious is to have a budget. However, in my experience, many of us don't.

The more detailed the budget, the better. J. Money, who is on my list of the top personal finance blogs, created a website dedicated to this topic. This is a serious website packed full of great tools to help you start or improve your budget. J. goes into great detail in tracking every dollar he spends.

There are couple of great budgeting tools to help you get started. One is You Need a Budget (YNAB). The YNAB app helps track every dollar spent. Their motto is every dollar has a job.

For those who don't want that kind of detail, Mint.com is an excellent option. Whichever tool you choose, or if you build your own, tracking expenses in a budget is the best way to manage and cut back on unnecessary outflows of cash.

In his book Financial Freedom, Grant Sabatier has a chapter on budgeting. I reviewed that chapter in an earlier post. Grant's view is that most budgets focus too much on the little expenses. He contends that creates a scarcity mindset that makes it hard to stick with the budget. His method is to focus on the three costs that make up almost two-thirds of our spending – housing, transportation, and food.

Whichever method works for you, make sure you get in the habit of operating on a budget. Forming this habit while you're preparing for retirement will go a long way to helping you achieve a successful retirement. You don't want retirement time to be when you start working from a budget.

I realize this is rudimentary advice for many of you. But I know too many people living without a budget and spending more than they earn. They figure they'll start the budget later, living it up in the meantime. The problem – “later” comes much sooner than we expect.

2. Reduce or Eliminate Debt

I know. I know. I'm stating the obvious. But seriously. Look at the numbers on the size of debt Americans carry.

It's safe to say that many people entering retirement carry debt with them. Get laser focuses on paying down or eliminating debt before you retire. It brings financial freedom like no other thing I know. There are two primary ways to pay down debt – the debt avalanche and the debt snowball.

The avalanche method promotes paying off the highest interest debt first to reduce the cost of the debt. The snowball method supports paying off the smallest balances first. The little victories, in theory, offer success that motivates you to keep going.

Whichever way you choose, get on track to get rid of high-interest debt.

3. Maximize Your Social Security Income

For most, Social Security is the only guaranteed retirement income option. This Social Security Bulletin estimates that 40% of baby boomers' retirement income will come from Social Security. Research sources indicate about half of all Americans file during their first year of eligibility, typically age 62. Starting at age 62 gives you reduced benefit but for a more extended period, assuming average life expectancy.

Waiting for full retirement (age 66 for most baby boomers) increases your Social Security income by 25%. If you can wait until age 70, your income grows by another 32%. Claiming early can be very costly in the long term. Take a look:

Age 62 66 70 Benefit $1,500.00 $2,000.00 $2,640.00

If married, divorced, or widowed, you have other options to increase your Social Security income. Make sure you thoroughly analyze your choices before making a decision. It is essential to get it right the first time. A 2010 rule change prohibits changing your Social Security election after twelve months.

Many people don't realize that Social Security income can be taxable. Know the rules to be sure and reduce the income tax on Social Security. We'll talk about that more in the next section.

4. Smart Withdrawals from Investment Accounts

Conventional wisdom says to take income from taxable accounts first, and then retirement accounts (IRAs, 401(k)s, etc.). However, that may not be the best option.

As much as 85% of Social Security income may be subject to tax. The income thresholds and tax consequences are as follows:

Fifty percent of social security for singles earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000 are subject to tax. Eighty-five percent of social security for singles making over $34,000 and couples earning over $44,000 are subject to tax.

Consider withdrawing from retirement accounts first. To minimize taxes, limit withdrawals to amounts that don't exceed the 15% marginal bracket. If this income means you can delay filing for Social Security, your benefit will grow, ideally, until age 70 (see above example).

If you need additional income, consider selling stocks or stock mutual funds held longer than a year in taxable accounts. Under the current tax code, you pay these taxes at capital gains tax rates (15% or 20%).

This strategy reduces IRA account balances, ultimately decreasing your required minimum distributions (RMDs) from your IRAs. RMDs must begin in the year following the year you reach age 70 ½.

Converting those IRAs to Roth IRAs is another consideration. Though you pay taxes in the year of conversion, withdrawals from a Roth IRA are tax-free.

5. Get the Right Assets in the Right Accounts

Having a diversified portfolio means owning multiple asset classes. That's the starting point.

Another way to help that portfolio be more tax efficient is through something called asset location. Most people have both taxable and tax-deferred investment accounts. Asset location is the process of deciding which investments go into which type of account. Here's how that might work.

Interest rates on taxable fixed income investments get taxed at ordinary income rates. That could be as high as 37% plus the additional net investment income tax of 3.8%. If possible, it's best to put these investments in a tax-deferred account like a traditional or Roth IRA. Earnings grow in these account tax-deferred. Taxes on those earnings are at ordinary income rates when withdrawn. Delaying the tax by placing them in these accounts can save a lot of money over time.

Real estate investment trusts (REITs) distribute income every year in the form of dividends. Unlike qualified stock dividends, tax rates on income from REITs are at the higher ordinary income rates. Placing these investments in tax-deferred accounts will save money on taxes every year as well.

You may own real estate properties as an investment. Be sure to understand how the income gets taxed here. There are ways to make this income tax-advantaged that are outside the scope of this article.

Capital assets like stocks, ETFs and mutual funds should be in taxable investment accounts (individual, joint, trust, etc.). Why?

Most companies owned in funds or outright throw off qualified dividends. That means you get the favorable dividend tax rate of either 15% or 20%. If you hold these investments for more than one year and sell them, your tax rates are at the lower capital gains rates.

The Downside

A downside to the asset location strategy may come from how you manage your portfolio. If you maintain your asset allocation by looking at all accounts as one portfolio, the asset location decisions are fairly easy.

If, however, you manage your portfolio based on the bucket strategy (each account tied to a specific goal) asset location may be more difficult. You may not be able to allocate across taxable and non-taxable accounts. If you're investing for a purpose in a particular account and the account gets depleted to pay for that goal, it's all likely in a taxable account.

To the extent possible, allocating your investments across taxable and tax-advantaged accounts may increase after-tax returns.

Final thoughts

The answer to the question we posed in the beginning, “how long will my money last in retirement” is not a simple one. It depends on many factors, some of which I've tried to cover in this post.

Proper personal financial management takes discipline. If you're married, it's much easier if both of you are on the same page. Couples need to talk about money and review their finances regularly. If both spouses are on the same page, achieving a goal of a successful retirement will be much more attainable.

Forming good habits during our working years makes it easier to continue those habits when we retire. I've stated multiple times in past posts that the three principles of personal finance – spend less than you make, save and invest the difference, and reduce or eliminate death, are simple, but not easy. The earlier we start, the better off we will be.

Another thing I often repeat about planning is this – learn to be flexible. Life gets in the way of our plans sometimes. Be willing to change and adapt as circumstances change.