“How long will my retirement savings last?” is a common question we see many retirees or those approaching retirement ask. While there’s no definitive answer to this question, this article will explore several methods you can adopt to help you sail through your golden years comfortably.
If you’re like most people, you probably imagine retirement as sitting on a beautiful beachfront soaking up the sun while sipping on a cold margarita. While this sounds like the ultimate dream, the truth is that retirement may also come with concerns about money if you don’t plan for it properly. “How long will my retirement savings last?” is a common question we see many retirees or those approaching retirement ask.
While there’s no definitive answer to this question, this article will explore several methods you can adopt to help you sail through your golden years comfortably.
How Much Do You Have Saved?
The first step to estimating how long your retirement savings will last is understanding how much your retirement accounts are worth. To do this, take a comprehensive look at all your retirement accounts, including:
- 401(k) and Employer-Sponsored Plans
- Individual Retirement Accounts (IRAs)
- Pension Plans
- Social Security Benefits
Once you have a number, you can start making the calculation.
How Much Will You Need Annually?
The next thing you should do is determine how much your retirement lifestyle will cost you on a yearly basis. This means doing a roundup of all the expenses you expect to spend money on, such as food, gas, housing, healthcare, travel (if you plan to do so), leisure activities, etc.
In most cases, your retirement lifestyle may be a little less expensive than your pre-retirement days because some expenses may no longer apply. For instance, commuting expenses to and from work will no longer feature in your budget, and the same may apply if you’ve paid off your mortgage.
While you could use your current expenses to determine how much you would need annually after retirement, some experts recommend using the 75 to 85% replacement rate. For instance, if you make $250,000 annually and choose an income replacement of 80%, you would need $200,000 every year in retirement to live comfortably.
How Long Will Your Money Last?
There are numerous online retirement calculators you can use to estimate how long you have until your retirement savings run out. However, it’s worth taking an in-depth look at the various factors that affect the longevity of your retirement money. These include:
- Inflation: One of the biggest factors that affect your savings is inflation. If the interest rates on your savings accounts don’t match the inflation rate, your purchasing power drops. This means you may need to reassess your future expenses.
- Healthcare Costs: Your health deteriorates as you grow older, and healthcare can be notoriously expensive. Even with Medicare, you may still need to pay for additional health insurance to cover other costs that aren’t part of the free package. These out-of-pocket payments negatively affect your savings.
- Withdrawal Rates: If you withdraw too much money too soon, your savings will suffer. This is because you’re depleting your principal faster than it can grow through investment returns.
Is It Possible to Stretch Your Retirement Savings?
The simple answer is yes.
Even with variables like inflation and unexpected expenses working against you, you can still make your retirement savings last a bit longer by incorporating several strategies, such as the following:
The Four Percent Withdrawal Rule
The 4% rule dictates that upon retiring, you may only withdraw 4% of your account’s total balance in the first year. In the following years, you should make withdrawals of the same dollar amount but adjusted for inflation. This rule is based on the assumption that the withdrawals will be equal to or just above the amount earned in interest or dividends without making too big a dent in the principal.
Created by financial advisor Bill Bengen, this rule may extend your retirement savings for over 30 years. Bengen tested this theory across a 50-year period with a heavy focus on the worst economic times in the U.S., and even then, it held up.
Dynamic Withdrawals
Instead of withdrawing a fixed amount like 4%, the dynamic withdrawals strategy accounts for other factors that may affect your retirement savings. It suggests that your withdrawals should vary according to market conditions and your changing needs. For instance, you might be able to withdraw more if the investment returns grow due to favorable market conditions, and vice versa.
The Income Floor Strategy
This strategy requires you to determine how much your basic expenses cost, and then ensure that you cover them with a guaranteed source of income like Social Security, bond ladders, or annuities. These expenses can include food, gas, utility bills, etc. As for the discretionary (non-essential) expenses, your invested savings can cover these. This approach helps prevent you from having to sell your assets during market downturns.
Portfolio Diversification
Depending on just one investment option during your retirement is a recipe for disaster. Market downturns can be so harsh that you end up losing a big portion of your nest egg. To prevent this, consider diversifying your portfolio with alternative investments like venture capital, commodities, and private real estate.
This strategy helps manage risk within your portfolio — if one asset class in your portfolio experiences volatility, the other assets can provide a cushion for your losses. Moreover, most alternative investments aren’t affected by trends in the stock or bond market.
The last thing you want during your retirement years is to go broke and become a burden to the people around you. That’s why knowing your options and making a plan well in advance is crucial. A wealth management advisor can help ensure you make the right decisions leading up to and during your retirement.
At The Spaventa Group, our wealth management program helps you get started on retirement savings no matter the stage you are in life. Moreover, we specialize in alternative investments, an essential component in a portfolio that provides much-needed stability during your retirement years.
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