If you have anxiety about outliving your retirement savings, you have company. Roughly 37 percent of current retirees say outliving their money is a big worry.
So, what’s the solution? Proper planning.
Retirement planning in Baton Rouge is something we focus on at Align Wealth Partners. Our financial advisors have seen many different situations, goals and priorities, and we know that everyone’s retirement plans are different – for some, it’s traveling the world, while for others, it’s staying put and spending time with family. However, a major concern is often the same: Will I outlive my retirement money? So, let’s answer that question.
Here are 4 ways to help ensure you won’t outlive your retirement money.
1. Save enough to cover your income needs in retirement.
Planning is crucial, so you save enough to cover your needs in retirement.
A rule of thumb is to save 25 times the amount you need to live on comfortably every year in retirement. In other words, if you calculate you will need $80,000 per year in retirement, you need a nest egg of $2 million when you retire.
It’s helpful to use a retirement calculator to calculate the yearly savings you’ll need. A 35-year-old planning to retire at 67, for example, would need to save 25 percent of an $80,000 salary, or $20,000 per year, to arrive at $2,041,461 as a retirement nest egg, assuming an annual return of 7 percent. (About that assumption: Since 1965, the S&P 500 has returned 9.7 percent on an annualized basis. The Dow Jones Industrial Average has returned 5.8 percent yearly on average for the last century, so a 7 percent assumption for the stock market is reasonable.)
Adjust your assumptions depending on how much you save reasonably save, your current age, and the age you plan to retire.
Ready to discuss your future with a financial advisor? Contact Align-Wealth Partners to see how we can help.
2. The 4 percent rule: Know it and use it.
It’s important to know how much you can withdraw in retirement without running out of money. One guideline often used in financial planning is known as the 4 percent rule. The idea is that people can withdraw 4 percent of their retirement savings per year in retirement and have it last for 30 years, which is ample time in retirement for most people.
In other words, if your retirement nest egg is $2 million, you can withdraw 4 percent, or $80,000, per year and be comfortable that you won’t outlive your retirement money. The same rule applies to any sum. If your nest egg is $500,000, for instance, you can withdraw $20,000 per year.
The 4 percent rule was devised in the 1990s by a financial planner whose clients were worried about how much money they could withdraw from their retirement savings accounts without hitting zero in old age. He developed the 4 percent rule as a way of providing them with a roadmap.
The 4 percent rule rests on several assumptions, as most financial planning metrics do. It assumes a portfolio that is 60 percent invested in stocks and 40 percent invested in bonds. Since it was devised in the 1990s, it assumed then-current interest rates, which were considerably higher than current interest rates.
If your own portfolio is very different, you may want to adjust the 4 percent rule. We also suggest talking with a financial advisor before making changes to your plan.
3. Allocate your portfolio prudently.
One anxiety that often lies behind the larger fear of running out of money in retirement is the prospect of a stock market downturn. The average annual return of stocks outpaces most other investments historically. But bear markets – declines of 20 percent or more – do occur periodically. What if a stock market downturn reduces the value of your retirement portfolio?
A good guideline for portfolio allocation is the rule of 110. Subtract your age from 110, and the result is the percentage you may want to allocate to stocks. The amount left over from that allocation is placed in fixed-income investments. So, if you are 45 years old, you would place 65 percent of your portfolio in stocks, because 45 subtracted from 110 is 65. With 35 percent of your portfolio left, you may consider placing 35 percent of your portfolio in fixed income. If you are 60 years old, you’d place only 50 percent of your overall portfolio in stocks, leaving 50 percent in fixed income.
Financial advisors understand the financial services industry, and good advisors understand that every situation is different, so you may consider turning to a fiduciary financial advisor for guidance.
As you can see, one benefit of the rule of 110 is that it places proportionally more of your portfolio in fixed-income as you grow older. It can increasingly protect your portfolio from any potential stock market declines, while still allowing you to benefit from stock market gains.
Declines in the stock market have a greater chance of hurting older people financially, because younger people have a longer time horizon to recover from the effects of a bear market. A 25-year-old caught in a bear market has 40 or more years to regain any losses suffered. But an 80-year-old who loses 20 percent of a stock portfolio will more than likely not have that long of a time horizon to recoup the losses, so needs a greater proportion of protection in fixed-income instruments.
4. Monitor your expenses and your income.
We encourage clients to have a budget that monitors their expenses and income. This allows them to plan for fixed expenses, such as any mortgage payments and monthly bills.
- Estimate variable expenses such as taxes and vacations.
- Make budget projections of what you think your spending will be.
- Review your projections periodically to ensure that they are tracking with your actual spending. If projections need to be revised upward or downward, you can make those changes so that you always have a realistic picture of your expenses.
Then, of course, make sure your expenses are in line with your income. This allows you to plan for life in retirement. If your expenses are in line with your income or under it, fine. But if you need to adjust your expenses downward in line with your cash flow or make more income, you’ll be able to plan accordingly.