Nearly six out of 10 Americans fear running out of money more than death, according to a survey by AIG Life & Retirement. We’ve seen this play out with our own clients. Many have saved enough money to last 30-40 years, yet some still pinch pennies as if they are going bankrupt.
One particular couple comes to mind, a retired doctor and teacher. Their income from a pension and Social Security is nearly $100,000 annually – about the same amount as their annual expenses. They don’t touch their investment account of approximately $2 million – yet they still worry they are spending more than they should. For example, just before the pandemic, they asked if they could afford to take a Mediterranean cruise that would cost around $10,000. Of course, they could.
If the past couple of years have taught us anything, it’s how precious life is. In the past year alone, we’ve lost clients to cancer, unexpected medical complications, heart attack and COVID-19. The pandemic gave all of us a wake-up call to ask what is really important in life. When it comes to money, the question is, how much is enough? While the answer is different for each of us, the facts show it may be less than you think.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are our recommendations to create peace of mind that you have enough:
Use the 4% Rule as a Guide in Retirement
The 4% rule is a well-known strategy. It suggests that retirees with a well-balanced portfolio can withdraw 4% of their initial retirement assets and increase this amount by inflation every year. It provides a steady income stream while also maintaining an account balance that keeps income flowing through retirement.
Here’s a simple example: A couple with $1.5 million in retirement savings can withdraw $60,000 each year. This amount is added to their Social Security, pension and other income, providing plenty of money to life a comfortable life. Meanwhile, over the long term, the remaining amount can continue to grow from gains in stocks, bonds and other investments.
For those who think they should spend less, we encourage you to research this topic, because spending too little is also a lifestyle risk. We see some folks spending less than 2% of their assets per year in retirement, which we like to point out would probably take another Great Depression to result in them running out of money. Thus, determining the right withdrawal rate based on your circumstances can make for a very comfortable retirement.
To Enjoy Retirement, Be Flexible with Your Spending
This is one of the most important conversations we have with clients as they approach retirement. We remind them they don’t know how long their health will allow them to keep doing the things they love, so make these activities a priority.
Whether it’s traveling the world or splurging on season tickets at the ballpark and dining at four-star restaurants, your expenses may exceed the 4% rule in the early years. But that’s OK. In reality, retirement spending often comes in a “U” shape as opposed to a straight line. Retirees often spend more in their 60s and 70s and less in their 80s. One of our favorite stories involves a client who was spending more than 4% shortly after he retired, and we warned him that he could run out of money if financial markets took a big hit. His response was unforgettable. He said he was losing a good friend of his almost every year, and he wanted to make sure he did everything he ever wanted to do before his number was up.
He said if the stock market crashes, wiping out a significant portion of his wealth, he would be just fine sitting on the back porch sipping lemonade while waiting for the grandchildren to come over and play. He was extremely comfortable tying his retirement largely to the U.S. economy and markets. Are you willing to do this to some degree?
We have told this story many times over the years to help new retirees frame their thinking as they shift from a savings to spending mindset. Hitching your retirement wagon to this country’s prosperity is a strategy worth considering.
Make Sure Your Portfolio is Well-Diversified
A portfolio with multiple asset classes allows you the flexibility to always have a piece of your portfolio doing well, or at a minimum holding up better, in an economic downturn. The secret to a successful retirement investment strategy is to always be willing to lean against the financial markets.
If the stock market keeps going up, you can take some gains when you need money. If stocks ever take a huge dive, use your cash and bonds to fund your living expenses. The sooner you realize your investment decisions in retirement should be more of a reaction to the current environment instead of trying to predict where it is headed, the better off you will be.
Reassess How Much Is ‘Enough’
At age 50, you may have set a goal of retiring with $3 million in investments and worked to achieve that amount. However, as you approach retirement, your priorities may have changed. And even if you haven’t met your $3 million goal you set for yourself years ago, you might find that the amount in the bank may easily fund your retirement.
We certainly understand that some people enjoy what they do; working well into their 70s can give them purpose. But we often encounter those who continue to put more money at risk with their investments, endlessly chasing after more.
It is not that uncommon to come across individuals who have saved enough to live a comfortable lifestyle for the rest of their lives, even if they kept all their portfolio in cash. While we would never recommend this ultraconservative investment strategy, some in this situation will still invest very aggressively in stocks even though a lower-risk, more stable and secure portfolio would be more than enough. Why risk anything to gain something you don’t need?
So, how would you answer the question How Much Is Enough? If you are seeking a life with fewer financial burdens and stress, one focused on spending time with those you love and doing things you enjoy, then figuring this out on your own or with the help of a financial adviser could change your life. For many Americans, the amount of money needed to comfortably retire may be less than you think.
-
Is Your Social Security Earnings Record Wrong? Here's How to Fix ItYour Social Security benefits are based on your Social Security earnings record. It's important to review your records to avoid having your benefits reduced.
-
Stock Market Today: Markets Discount Another U.S. DowngradeAfter Friday's closing bell, Moody's followed Standard & Poor's and Fitch and cut its rating on U.S. government debt.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
