In a new survey by the American Institute of Certified Public Accountants, 41% of CPA financial planners said that running out of money was their clients’ top financial concern when planning for retirement, and fully 70% said depleting savings ranked among their clients’ top three worries, along with maintaining their current lifestyle and rising healthcare costs. And yet…other research shows that many people apparently aren’t alarmed enough about this risk to seriously plan for it. According to TIAA’s 2016 Lifetime Income Survey, fully 65% of American adults haven’t even figured how much income they can expect to have each month after they retire. So how can you increase the odds that your nest egg will be around at least as long as you are? Here are three key things you need to do:
1. Begin planning before you call it a career. Ideally, you should start focusing on how much income you’ll need in retirement a good five or so years before you expect to retire. Many people assume that their spending—and thus the income they’ll require—will automatically drop after retiring. But that’s not necessarily the case. The best way to get a fix on your likely spending is to make a detailed retirement budget. You can do that going to BlackRock’s Retirement Expense Worksheet, which has room for more than 50 separate expense items in eight categories ranging from household and medical costs to travel and entertainment expenses.
The years leading up to retirement are also a good time to begin thinking about lifestyle issues, as they can directly affect your income needs. Considering selling your home and moving to a smaller residence as a way to lower housing costs and free up some extra cash for spending? Well, better to check out the real estate market in your area well before you leave your job to see whether the downsizing benefit you expect to reap is realistic. Similarly, if you’re counting on collecting extra income by working part-time after you retire, it’s a good idea to visit a site like RetiredBrains to see what kind of jobs are available for someone with your qualifications and what they pay.
By getting a head start on your planning rather than waiting until you’re on the verge of retirement, you’ll be better able to assess whether you’re really as prepared to retire as you think, or whether you might be better off staying on the job a bit longer to give yourself more wiggle room.
2. Develop a more detailed strategy as your exit from the workforce draws nearer. As you get closer to pulling the trigger on retirement, you can step up your planning effort. One critical issue you’ll need to address is whether to postpone taking Social Security benefits to qualify for the roughly 8% higher payment you’ll receive for each year you delay. The answer will depend on such factors as how long you expect to live; the rate of return you think you can earn on your retirement investments; and, if you’re married, whether you and your spouse might be able to maximize benefits by coordinating when each of you claims. You can get insights into this decision by going to Financial Engines’ Social Security calculator.
You’ll also want to settle on an appropriate withdrawal rate for tapping your nest egg. The idea is to get enough income from savings so that the money you pull from your nest egg, combined with Social Security, will allow you to maintain an acceptable lifestyle in retirement. At the same time, you don’t want to withdraw so much that you run the risk of going through your savings too soon.
With yields today so low and many investment pros expecting anemic investment returns in the years ahead, an initial withdrawal of somewhere between 3% and 4% of savings that is subsequently adjusted each year for inflation is probably about right if you want your savings to last at least 30 years. But you can estimate how long your savings might last at a variety of withdrawal rates given your age, how long you expect to live in retirement and how your retirement assets are invested by going to T. Rowe Price’s retirement income calculator, which you’ll find along with other useful resources in the Tools & Calculators section of my site.
Given today’s long lifespans, you may also want to consider converting a portion of your nest egg into income that’s guaranteed to last no matter how long you live and regardless of how the financial markets perform. Several different types of annuities can provide such income, but I think immediate annuities and longevity annuities are generally your best options. The premise behind each type is pretty straightforward. With an immediate annuity, you turn over a lump sum to an insurer and start receiving monthly payments immediately. With a longevity annuity, on the other hand, the payments don’t begin until some point in the future, typically 10 to 20 years after you retire. To see what size payment you might receive from each type based on your age, sex and when you want payments to begin, you can go the payment calculator at Immediateannuities.com.
3. Be ready to adapt as conditions change. A retirement income plan, no matter how carefully thought out, isn’t something you can create and then set on autopilot for the remainder of your retirement. You could incur large unexpected expenses; your investment might perform better or worse than expected; your lifestyle and spending needs could change. So you need to periodically monitor your plan to ensure that it’s still on track and, if it’s not, make some adjustments to bring it back in line.
For example, if the combination of withdrawals and a severe market downturn so depresses your portfolio’s value that you’re in danger of depleting your nest egg prematurely, you may want to scale back withdrawals for a few years. Conversely, if superior market performance over several years has caused the value of your assets to balloon, you might consider spending more freely to avoid ending up with a big account balance late in life and the realization that you lived more frugally than you had to earlier in retirement. Periodically revving up a tool like the withdrawal calculator I mentioned above can help you assess whether you need to tweak withdrawals.
If you feel that creating and monitoring a retirement income plan is more than you can handle, you can always get assistance, whether by hiring a financial planner or consulting an advisory service that can help you both invest your nest egg and recommend an appropriate withdrawal strategy. But when it comes to something as important as turning a lifetime of savings into income you can depend on throughout retirement, you don’t want to wing it. One way or another you need to come up with a plan.