Retirement. The dictionary defines it as the act of leaving one's occupation and ceasing to work. That may be true, but what does it actually look like to retire?
The truth is that it’s not all leisure, although that’s certainly part of the plan. If you’re like most retirees, you’ll be living off of savings, pensions, or some other sort of mostly fixed income acquired during your working years.
You’ve worked your whole life to save money for retirement, and now you need to work hard to get the most out of those dollars. If you don’t yet have an active financial strategy to stretch out your dollars, here are a few tips to consider for trying to make your retirement savings last as long as possible.
1. Have a withdrawal strategy
A common baseline is to withdraw between 3 and 5 percent of your total savings during your first year of retirement. In future years, you can adjust this amount up or down based on inflation.
For example, if you retired with $500,000 and decided to initially withdraw 4 percent during your first few years, you would take $20,000 from your savings portfolio. If the rate of inflation during those years was 3 percent, you would need to increase the amount you withdraw by $600 ($20,000 x 3%), which would bring you to a total of $20,600.
If you’re asking, “How do I know what amount or percentage to withdraw?” the answer is it depends on a number of factors including your asset mix, lifestyle, and living expenses. If you have an aggressive mix of investments in your portfolio that are bringing you a high rate of return, then you can potentially spend more. Likewise, a more conservative mix may necessitate that you withdraw less from your savings.
2. Be flexible
Having a rigid withdrawal plan based on straightforward calculations is not a reality for most retirees because your actual spending will fluctuate based on planned life events and other unforeseen events that may necessitate adjustments in spending.
You may have obligations like needing a new car or unforeseen medical expenses that require you to spend more during certain years. If that happens, it’s important to be flexible enough that you find ways to offset those expenses during the next year or so with some belt tightening, or you run the risk of running out of money down the road.
3. Plan for a shortfall
If it turns out that you’re spending more than you’re comfortable with during certain years and you can’t be flexible with your expenses, then you run the risk of running out of money sometime during retirement.
However, there are ways to address this potential shortfall. You could consider the following:
- Work part-time.
- Wait a few more years to retire.
- Buy an annuity to cover essential expenses.
Annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Other options include curtailing vacations and other non-essential spending until you find a way to balance spending at a more predictable rate. The point is that you have options and should consider any that you think are reasonable based on your lifestyle and spending needs.
4. Capitalize on market trends
If you have discretionary funds available to you and are not too risk-averse, you could consider taking advantage of market trends by investing in stocks or some other form of investment that has potential to generate return.
However, although some stocks are capable of yielding returns, they are also potentially volatile and risky. If you are more risk-averse, you might be able to invest in something like a money market account which will earn a smaller but more certain yield and is much less volatile than stocks.
5. Get help from a personal advisor
If you find the whole idea of managing money daunting, consider seeking help from a qualified financial advisor who is willing to act as your fiduciary. A fiduciary agent is an individual who is obligated to act in your best interest.
Whatever approach you take toward making your retirement savings last, ensure that you remain flexible to account for unforeseen events and consider options that will earn returns on the money that you’ve worked so hard to save.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal.