Spending your savings can be a lot more complicated than building them up. Many chronic health conditions are associated with higher medical costs in retirement, including diabetes, high blood pressure, high cholesterol, arthritis and heart disease, according to a study by Vanguard and Mercer Health and Benefits. Make a plan to replace your paycheck Investing in retirement. The stock market entered a downward spiral just as the Longs were tapping into their retirement savings. Life insurance. It often indicates a user profile. In this situation, your chances of running out of money go down.
Live off your interest
To make sure your retirement nest egg goes the distance, you need growth as well as income. Rule number one: Don’t dump stocks. Inafter teaching math for 34 years at a private school in the Washington, D. He spent a few months training his successor as head yiur the math department and, in December, retired at the relatively young age of Bob’s wife, Margaret then 56mzking retired a few months earlier from her job in the mortgage industry.
1. Keep earning money, even if it isn’t at your primary job
Every upcoming retiree wants to know how long their money will last in retirement. To come up with an answer, you need to address all of the seven items in this list. The rate of return you earn on savings and investments will have a large effect on how long your money lasts. Same with stocks. There have been decades where stocks provided outstanding returns and decades where the returns were about the same as what you would get if you had stuck with safe investments.
Don’t dump stocks
To make sure your retirement nest egg goes the distance, you need growth as well as income. Rule number one: Don’t dump stocks. Inafter teaching math for 34 years at a private school in the Washington, D. He spent a few months training his successor as head of the math department and, in December, retired at the relatively young age of Bob’s wife, Margaret then 56had retired a few months earlier from her job in the mortgage industry. The couple were eager to kick back in their new home, in Ocean Pines, Md.
Their timing couldn’t have been worse. The stock market entered a downward spiral just as the Longs were tapping into their retirement savings. They expected their money making your money last in retirement last well into their nineties, based on retirement calculators, so they were rattled to see their balance shrink so quickly. If their timing was all wrong, their response was just about perfect.
Rather than bail out of stocks in a down market, they stayed the course and stopped looking at their brokerage statements. They were conservative in the amounts they took from their retirement accounts.
And they dipped back into the workforce. Bob returned to the classroom as a substitute teacher, and both he and Margaret took short-term jobs at the Census Bureau—for fun and pocket money. The Longs’ restrained approach was rewarded when the market and their nest egg began to rebound after March But they and other retirees can’t be guaranteed they won’t face future challenges.
At 65, you’d think you could stop worrying about building your retirement stash and focus on preserving it. But with today’s longer life expectancies a year-old man can expect to live until 84, on average, and a year-old woman can expect to live until age 86″you have to take on some level of risk if you want to keep up with and beat inflation,» says Nate Wenner, a certified financial planner in Edina, Minn.
How you invest within those parameters gets tricky, says Blanchett, given that bond yields remain low by historical standards recently 2. Aim for a diversified portfolio that includes U. As you get further into retirement, gradually reduce risk by shifting to more bonds and cash. Making the adjustments yourself can be a bother; instead, consider putting your money in a target-date fund if you haven’t alreadywhich adjusts the mix for you.
Be aware that funds have different asset mixes and different timetables for adjusting them, called glide paths see Pick the Best Target-Date Fund for You. Another strategy is to carve out part of the money you would otherwise put in bonds to buy an immediate fixed annuity, which delivers a guaranteed income for as long as you live.
Low interest rates are dampening the income you can generate with a single-premium immediate annuity—the meat and potatoes of the annuities world—but there are ways to boost the payouts, such as laddering or buying a deferred-income annuity see Add an Annuity to Your Retirement-Income Mix. Smart distribution of your assets is only part of the challenge. You also need to adopt a strategy to make your income last for the rest of your life.
If you can’t get by with Social Security, a pension and savings, consider tapping your home equity through a reverse mortgage see Fill the Gaps in Your Retirement Income. One obvious way to ensure you won’t run your portfolio dry is to siphon off the interest, dividends and perhaps the capital gains on your investments and preserve the principal. At current interest rates, you’d need a hefty amount plus a decent guaranteed income to generate a respectable paycheck.
If you’re accustomed to a more lavish lifestyle, that may not be enough, especially considering taxes for tax-efficient ways to tap your accounts, see How to Lessen the Tax Bite in Retirement. You could supplement the amount by working part-time for the first few years of retirement, postponing the point at which you draw down your principal—at least until you have to take required minimum distributions.
The longer you wait to tap your nest egg, the shorter your time horizon becomes and the less likely your money making your money last in retirement run. Better yet, work a little longer and delay taking Social Security until you hit But historical averages don’t necessarily reflect the conditions you face out of the starting gate, and those conditions can have a disproportionate effect on where you end up.
Low interest rates, which are expected to last for at least several more years, make for another game changer. If you buy a ten-year government bond today, he says, you get 2. That’s about three percentage points below the long-term average. Rather than stick to a rigid formula, lower your payout or skip the inflation adjustment, as the Longs did when market conditions are against you.
Then take it up a notch when your investments are thriving. Not so much today. This method has you start with a minimum payout rate of 3. The IRS life-expectancy tables for a year-old man use an average life expectancy almost twice as long as the one actuaries at Social Security use. Here’s an example from Vanguard. But there’s a catch: At age 90, your purchasing power starts to creep back.
Add to that the risk that the RMD formula might cause you to take too big a bite out of your savings during a market decline and you’ll see that the system, though convenient, is not risk-free, adds Bruno. Another way to hedge your bets against market downturns and other unpleasant events is to position your money in various buckets. With this system, you invest enough money in liquid, conservative accounts to cover several years’ worth of basic costs and the rest in short- and intermediate-term bonds and growth-oriented investments, such as stock funds.
To set it up, calculate how much of your essential expenses you can cover with guaranteed income, such as Social Security and pensions.
Put enough money to cover the rest of your expenses for several years into safe investments, such as money market funds and short-term CDs. Use a second bucket for discretionary expenses, such as travel, putting that money into short- and intermediate-term bonds. With current interest rates, you won’t get much additional yield over the first bucket, but that will change as rates go up.
The remainder would go into a third bucket, a mix of stock and bond funds. You replenish the first two buckets by rebalancing and taking profits from the. Or use just two buckets, one to cover expenses and the second to nurture growth.
When the stocks hit his assessment of fair value, he sells, using the money to replenish the first bucket. An annuity also works with the two-bucket strategy: You use the income from an immediate annuity plus Social Security and any pensions to cover your fixed expenses and let your growth investments ride. You’ll hedge your bets even further by buying an inflation-adjusted annuity, although you’ll receive a lower initial payout. The bucket strategy does present a couple of problems: Unless you rely solely on guaranteed income, your portfolio will become increasingly conservative as you sell stocks to replenish the first bucket, skewing the mix, says Tracy Burke, a certified financial planner in Harrisburg, Pa.
And your bucket strategy may compete with your tax strategy see How to Lessen the Tax Bite in Retirement. If you decide to use this strategy, consult a financial adviser.
In fact, that’s good advice to follow before you settle on any arrangement. So how are the Longs faring, six years after retiring into that disastrous bear market? Quite nicely. Other than an occasional return to the classroom for Bob, the couple are now fully retired.
Not only are they enjoying a more leisurely existence including crafts for her, golf for himbut Bob is back to checking his investments regularly. I’m a numbers guy. I’ll look just for the fun of it. That uncertain feeling of and —we don’t have that anymore. Haven’t yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security.
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Don’t dump stocks
That uncertain feeling of and —we don’t have that anymore. At 65, you’d think you could stop worrying lqst building your retirement stash and focus on preserving it. Maximize your Social Security. Resist the urge to help your family more than you can afford Of course, you love your family and want to help them. But remember, no one is average. Read on to learn more about how to create an immediate annuity.
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