The biggest anxiety most people have is that they will outlive their money in retirement. Some estimates suggest your retirement could last 20 to 30 years, given longer life expectancies and a greater emphasis on healthy living. The previous generation worked until their early 60s, earned pensions and collected Social Security. Today, most people expect that they will rely on their own savings, and some worry that Social Security will no longer exist.
One of the main reasons people run out of money is they don’t realize what they’re spending and where. So, have a realistic spending plan that separates needs (housing, food, healthcare, etc.) from wants (travel, entertainment, charitable giving, etc.) While things will change, you need that spending plan well before retirement arrives so you can make any necessary changes to your spending patterns, as well as any other course corrections such as saving more, retiring later or changing your investment strategy.
The first step is identifying the sources of income you can count on, then talking with us to determine how much of your retirement needs will be covered by those more reliable income sources (for example, the Social Security payments mentioned above). Any assets left over will then be available to pay for your wants. However, if you need more income to cover the basics, you’ll likely need to draw from additional sources, such as:
- Individual retirement accounts (IRAs)
- 401(k)s
- Pensions
- Other personal savings
- Income-producing investments, such as bonds that provide fixed income, dividend-yielding equities, real estate and annuities
Even if you have more than enough saved to take care of your family’s needs, that doesn’t mean you should sell your investments and put all your assets in a bank account where it earns very little interest. It may be smarter to take out only what you need, when you need it, as part of a systemic withdrawal strategy, thus allowing the rest to potentially build over time. If you have more assets than you can use in your lifetime, your heirs and other beneficiaries (perhaps a favorite charitable organization) may benefit from your strategic planning.
A good rule of thumb is to structure an income stream that replaces about 80% of your pre-retirement income. However, new retirees can typically use up to 130% of what they were making in the more active years of early retirement because they likely have more discretionary time to travel, shop and do the things they didn’t have time to do when they were working full-time. It's also good policy before you retire to try living off your projected income for several months to see if the goals you set are realistic. Regardless of how much you have set aside, the key factor that determines whether your savings will last as long as you do is how much you withdraw from your nest egg each year. Raymond James recommends that retirees use an initial withdraw rate of between 4 and 5 percent, adjusting that figure higher annually to account for inflation. For example, withdrawing $40,000 (pretax) from a $1 million portfolio in the first year and increasing that initial amount by 3% each year ($41,200 in year two, $42,436 in year three, etc.) has a high probability of being sustainable for a 30-year period.2
If you’re behind, streamlining your lifestyle will enable you to increase your savings. See if you can take 5% out of your expenses, and then see if you can cut another 5%. It may not be as hard as you think, and the earlier you do it, the more impact it will have. As mentioned above, other ideas would be delaying retirement by a year or two or working a part-time job in retirement.
This is a hypothetical example for illustration purposes only. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or withdrawal decision. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.
