A big financial challenge retirees face is ensuring their savings last the rest of their lives. It’s a daunting task for those making the transition into retirement as well as for those already in retirement. While saving as much as possible during your working years is important, the decisions you make in retirement are also very important. Fortunately, there are steps you can take to improve your odds of financial success. Here are 10 of them.
The above are edited excerpts from an article* by Charles Rotblut (aaii.com) entitled 10 Ways to Make Your Retirement Savings Last.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Rotblut goes on to say in further edited excerpts:
1. Withdraw a Safe Amount—Limiting the size of withdrawals from your retirement savings is critical for ensuring your portfolio lasts throughout your lifetime. William Bengen calculated a 4% withdrawal rate, adjusted upward annually to account for inflation, as having a very high probability of ensuring a retiree will not run out of money. You may be able to sustain a higher withdrawal rate, but the risks of running out of money will increase as well. Even bumping the withdrawal rate to 5% comes with some increased risks, though going above this level significantly increases the risk of a shortfall.
2. Allow for Variability in Your Spending—The 4% withdrawal rate is a good benchmark for determining how much to withdraw, but it’s just a benchmark. During good years for the market, you may be able to withdraw much more from your retirement savings; during bad years, much less. You will also have years when your spending is elevated (vacations, home repairs, medical bills, etc.) and years when your spending is lower. By allowing for variability in your spending, you can help to offset the blow taken from the years with bad market conditions or high spending.
3. Be Cognizant of Longevity Risk—Longevity risk is the probability of outliving your savings. The Social Security Administration estimates a 25% chance of a person turning 65 today living past age 90 and a 10% chance of living past age 95. (The average life expectancy is 84 for a man and 86 for a woman.) These numbers mean a person retiring today could potentially be looking at living off of his or her retirement savings for at least 25 or 30 years.
4. Be Cognizant of Inflation Risk—Inflation erodes purchasing power, which is your ability to buy goods and services for the same dollar amount. Just as bread costs more now than it did 20 years ago, it will cost even more 20 years in the future. Inflation risk is one of the key reasons why it is important to think about growing your wealth even after you have retired.
5. Maintain an Exposure to Stocks—A common perception we hear involves how conservative a portfolio should be in retirement. Though a retiree dependent on portfolio withdrawals should have a more conservative allocation than a 25-year-old, the retiree should maintain a significant allocation to stocks. Opinions vary on how significant the equity allocation should be, but if you want to offset longevity and inflation risk, you need to keep investing in stocks. Our conservative portfolio allocation model suggests a 50% exposure to stocks for those 55 and older. This said, the best allocation for you is dependent on your age, health, wealth, goals and your psychological ability to tolerate market volatility.
6. Touch That Principal—The concept of “never touch principal” may sound good in theory, but is difficult to follow in a low-yield environment. It can even lead to riskier investing decisions if investments are primarily selected on the basis of absolute yield. Furthermore, if your assets are rising in value, you will have capital gains to help fund your retirement withdrawals. A good compromise solution can be to rely on portfolio income first and then supplement it with capital gains. Realize that you saved your whole life so you can have money to spend in retirement.
7. Delay Claiming Social Security—Postponing the date at which Social Security is claimed until age 70 will maximize your lifetime benefits if you live past age 80. If you live into your 90s or 100s, the difference in cumulative benefits will be significant.
8. Get a Job—Working in retirement will provide extra income. The salary can, in turn, help you withdraw less from your retirement savings. There are also studies linking employment to longer lifespans. Plus, if you are past full retirement age, your Social Security benefits will not be reduced. A greater proportion of your benefits could be taxed, but the gross amount paid by the Social Security Administration won’t be reduced. (Full retirement age is 66 for people born between 1943 and 1954. It increases by two months per year thereafter to 67 for someone born in 1960 or later.)
9. Pay a Company to Cover Your Risks—While you cannot forecast future medical care costs or your longevity risk with certainty, you can pass along these risks to a corporation. Annuities can guarantee a stream of income until you die, no matter how long you live. Long-term care insurance will help cover expenses related to daily living activities (e.g., bathing, eating, continence, etc.) when you are medically no longer able to handle those tasks yourself. A life insurance policy can ensure there is money to pass along to your heirs.
10. Live Very Well—A healthy diet, exercise, engaging in mentally challenging activities, avoiding risky activities and generally using moderation have been shown to help maintain good health. Ignore this advice and you will risk shortening your lifespan, which in turn would mean not needing your savings to last as long.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.aaii.com/investor-update (© 2011 American Association of Individual Investors)
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