With average life expectancies rising, one of the main concerns for working Americans reaching retirement is: How can I ensure that I won’t outlive my savings? Here are five ways to make your money last:
Plan ahead
Only 18% of American workers feel “very confident” they’ll have enough money for a comfortable retirement, reports a 2017 Retirement Confidence Survey (opens in new tab) conducted by the Employee Benefit Research Institute (EBRI).
To figure out how much you’ll need to save, begin with estimating how much of your current income you’ll need to replicate in retirement (a good amount for the average American is around 80%). After calculating your current saving and spending, factor in any anticipated changes (e.g., decreased expenses if you pay off your home). Also, remember to include costs for new hobbies and travels in retirement.
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Next, determine available fixed income sources, such as Social Security or a pension. Delaying and maximizing Social Security should be your first priority. These payments are guaranteed for life and receive a cost of living adjustment (COLA), though they are not substantial. Retirees might even be able to take advantage of Social Security claiming strategies with their spouse.
If your income falls short of your estimated expenses, you will have to rely on savings to bridge the gap. In establishing a plan beyond just expenses and savings, there is no guarantee that this plan will last 30 years or more if you don’t have enough or expose your savings to additional risk. According to the Society of Actuaries, there is a 45% chance that one spouse will live past age 90.
Use the modified “4% Rule”
Many people are familiar with the “4% withdrawal rule,” which assured retirees that by holding their annual withdrawals to 4% of their retirement portfolios it would allow their portfolios to last 30 years. However, that advice appears outdated and overly optimistic. A 2013 “Low Bond Yields and Safe Portfolio Withdrawal Rates (opens in new tab)” report by Morningstar found that the modified “safe” withdrawal rate is 2.8%, and a retiree would be more than 50% likely to run out of money withdrawing 4%.
Retirees should follow the modified 4% rule and reduce the amount for withdrawals from their retirement accounts every year after big losses or gains in their portfolios, inflation and other circumstances.
Consider working a few more years
There are numerous reasons why some experts are advocating waiting a few extra years before retiring.
Staying in a job allows you to continue growing your savings and gain returns on investments without needing to use them right away for retirement living expenses. It also can help you delay and boost Social Security and pension benefits. Delaying Social Security until age 70 is beneficial since you will receive an 8% gain every year after achieving full retirement age (FRA), usually 66 for most people today. You can either boost your own benefit or maximize your spouse’s benefit.
This helps if you have a younger spouse who can gain from increases in fixed-income plans, not to mention valuable employee benefits such as life insurance or 401(k) contribution matches by an employer. Another benefit is health insurance, which, depending on your employer, might cost less than Medicare and provide more comprehensive coverage.
Buffer for long-term care costs
Costs for long-term care like a nursing home can be overwhelming these days, with the average nursing home costing around $80,000 per year.
A 2016 Cost of Care Survey by Genworth (opens in new tab) found that the average cost for assisted living was $43,539, home health care was $46,332, and a semi-private room at a nursing home was $82,125. Many insurance policies for long-term care can be costly or have restrictions that may not help as much as they might suggest.
Besides traditional long-term care insurance policies, which have increased in price in the last several years, there are several other options. Life insurance policies have incorporated long-term care as well as specially designed long-term care annuities. A word of caution that many insurance companies have added “enhanced withdrawal benefits” to their annuities once you meet two out of six Activities of Daily Living (ADL); however, these are not the same as a long-term care annuity.
Consider adding an annuity
One of the best sources for fixed, guaranteed income just like Social Security or a pension is an annuity. Annuities aren’t investments; they are a transfer-of-risk insurance product against running out of income in retirement. Typically, retirees should consider allocating a portion of their savings into the right type of annuity to not stress their retirement accounts with too much risk.
Depending on the type of annuity (e.g., immediate, fixed, fixed-indexed or variable) monthly payments are based on your age and interest rates at the time it is set up. Not all annuities are created equally and you should know the differences between each and make sure they align with your goals.
In summary, retirees need to plan as if they were to live until the ages of at least 90 to 100; because in today’s world, there is a much higher probability of that happening.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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