Doug Gjerde, MBA, CFP©, CEPA
Retirement: just the word alone is enough to spark fear in many people nearing that stage of life. And the biggest concerns on most people’s minds? Will I run out of money and struggle to make ends meet in retirement? How long will my savings last in retirement?
Running out of money is the top fear, cited in many surveys, yet a solid retirement income plan can reduce those fears. Knowing the steps you need to take now and during retirement can help ease your worries about running out of money later down the track – leaving you open to enjoy what should be some of your happiest years yet.
Let us walk through some smart methods you can use today to help ensure that financial security remains throughout your retirement, help ensure there are no unexpected shocks or nasties along the way!
Would you leave something as important as whether your money lasts your lifetime up to chance?
Are you torn between enjoying your savings now and planning for them to last throughout your life? It’s a common dilemma when planning for retirement. Without knowing how long you’ll live or how long your funds must stretch, it can be tricky to strike a balance. But don’t worry – there’s a solution.
By properly estimating your life expectancy, you can make smarter financial decisions regarding how much of your savings to spend each year.
It’s important to consider the possibility of living longer than average, which is typically around 83 or 87 years old. By doing so, you can have the financial confidence that you’re prepared for any curveballs that life may throw your way. Many of my clients say they don’t think they will live to be 95 years old. Why do we push for a longer planning horizon?
Life expectancy tables show that most people will live to be 83 or 87 years old on average (women longer than men on average). The average age for people to live is just that – an average. That means half of us will live longer, some even much longer. Although a 65-year-old person may have a 22 percent chance of living up to the age of 90, if the person is part of a couple of the same age, there is a 47 percent chance that one of them will reach that age. Furthermore, there is a 20 percent chance that one of them will live beyond 95 years old.
Don’t plan for your money to only last until the average age. That is like leaving the chance your money will last long enough to the flip of a coin.
Don’t withdraw more than your portfolio can recover from.
As we plan for retirement, the uncertainty of investment performance and market downturns is always at the back of our minds. But fear not, there are ways to minimize the impact these dips have on our finances in the long run. One strategy involves limiting the amount we withdraw from our savings each year, so as not to drain it too quickly and to allow it to recover from inevitable market corrections.
This way, we can enjoy our retirement years without the fear of running out of money. To determine a sustainable withdrawal rate, a formula considers potential market downturns and calculates the amount that can be withdrawn while safeguarding our savings for the future.
Sustainable withdrawal rates help with retirement planning. They are between 1-5% of retirement savings and your rate depends on your goals, how you invest, and the risk of running out of money. Knowing all these factors can help you make a retirement plan that will last you a long time. 1 Your financial planner can help you with these critical decisions.
Don’t let fear deplete your savings.
As you get older, you might want to be more careful with your money. But if you are too careful, you might use up all your money too quickly. Unless you have a grand sum that can sustain your lifestyle without tapping into interest or earning any gains, it is wise to invest the money. Very few individuals are in a financial position where they can simply stash their hard-earned funds under the mattress and have enough to dole out for life. Being too conservative can be the cause of running out of money.
On the other hand, when you are retired, you need to be careful not to take too much risk with your savings. Something called the sequence of returns risk means that if the market goes down several years in a row at the wrong time during retirement, it may cause you to run out of money. Bucketing may help with this problem as well as the too-conservative problem.
The bucketing strategy is a way to manage risk in retirement. You separate your money into different “buckets”, or time segments. These buckets are for spending in the short, medium, and long term. The money you need soon should not be invested in the same way as money saved for late retirement.
To plan for your financial security throughout the entirety of retirement, having a short-term and medium-term bucket is essential. The short-term bucket should cover everyday expenses and provide cash flow for upcoming years. Simultaneously, the medium-term one should be more conservative to maintain income during the middle part of life post-work. Investing wisely with plenty of conservative options will create an ‘immune system’ that protects against poor returns which would otherwise deplete all funds too quickly.
The long-term bucket should have money that won’t be used for years – later in retirement. This is because if the market goes down, you don’t need to sell right away, and it will have time to go back up again. Having enough money in this bucket can help you keep up with rising costs and make your money last longer.
For those who prefer to play it safe, the third investment bucket offers an opportunity to stay ahead despite rising costs. With a better understanding of the stock market’s cyclical behavior and being aware that funds allocated for long-term goals can remain undisturbed for 7 to 10 years, retirees can be more at ease with their investments.
Additionally, reassuring yourself that you have kept enough money stashed away in conservative investments provides solace in knowing it won’t probably diminish quickly. This prevents one from squandering resources by practicing extreme caution when managing retirement finances.
Retirement doesn’t have to be a source of worry.
Retirement can be a source of worry if we feel unprepared for the reality of leaving behind steady incomes and managing our financial resources. Taking the necessary steps to help ensure that your money will last as long as you do, including:
- Planning for the possibility that you may need it to cover far more years than originally planned.
- Not spending too much or investing too conservatively or too aggressively.
Planning for retirement takes extensive thought, research, and strategy. Every individual’s financial situation is unique; therefore, there is no one-size-fits-all approach to achieving a secure financial future.
If you have reservations about understanding all the components needed in retirement financial strategy, don’t hesitate to work with a retirement planning specialist. They have specialized knowledge and will help identify potential problem areas, as well as develop strategies tailored around your situation so that you can best position yourself financially before and after reaching retirement age.
Remember, it is not too late to start planning or too late to fix things! Contact us to create a plan tailored to fit your individual financial needs.
1 If not 4%, what’s a sustainable withdrawal rate https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/sustainable-withdrawal-rate.html and What’s a Safe Withdrawal Rate Today https://www.morningstar.com/articles/1128840/whats-a-safe-withdrawal-rate-today