Don’t Outlive Your Retirement Savings
You may have specific ideas of how you’d like to spend your retirement. Maybe you plan on finally being able to travel the world or at least as far as the nearest beach. Perhaps golfing is more your style and you envision long days out on the links. But have you given much thought as to whether your current strategy for retirement savings is sufficient to meet your needs for the rest of your life?
There are several steps that you can take today to avoid outliving your retirement savings.
Estimate Monthly Expenses
To know whether or not you are on the right track to not outlive your retirement savings, you will have to estimate your expected monthly expenses during retirement
While making sure to account for inflation, list all of your fixed expenses that will continue throughout retirement such as utilities, taxes, and any outstanding loan payments. Estimate your variable expenses for food, gas, and household expenses as well.
Finally, determine the lifestyle you want in retirement. A retirement spent travelling the world takes considerably more savings than one spent at the local fishing hole.
Review All Income Sources
Once you have a rough idea of your monthly expenses in retirement, it is time to consider all of the income sources you will be able to access once you retire.
Social Security: Social Security provides some of your income during retirement but you likely cannot rely on it to cover all of your expenses. Your monthly Social Security payment is dependent on your wages throughout your lifetime and the age at which you begin to draw payments. If you delay the age at which you receive payments you will increase the amount of your monthly benefit. You can visit the Social Security Administration website to access their retirement estimator to estimate the amount of benefit you are expected to receive when you retire.
Pension: Company sponsored pension plans, also called defined benefit plans, are increasingly being phased out. If you are lucky enough to find yourself with a company sponsored pension plan, talk to your benefit department to make sure you understand how much monthly income it will provide during retirement.
401K/IRA/Roth IRA: Any proper retirement plan should contain a self-funded retirement savings account. If you have a 401K plan through your employer, you should contribute at least enough to receive your employer’s matching contribution. Not contributing enough to receive the full match is like declining free money.
If you don’t have a 401K at your workplace or if you’d just like to supplement your savings in an account you have more control over, you should have an Individual Retirement Account (IRA) or a Roth IRA. You fund a traditional IRA with pre-tax money and pay taxes on the funds you withdraw at retirement. Conversely, you fund a Roth IRA with after-tax dollars but withdrawals during retirement are tax-free. Consult with your accountant to see which account is right for your financial situation.
With any retirement savings account, you will need to estimate the amount you are able to withdraw monthly during retirement without touching the principal. If you simply withdraw the interest you are earning, you will never outlive your retirement savings. For example, if you have $1,000,000 in savings at retirement earning 4% interest, you could withdraw over $3,300 per month without ever touching your principal.
Consider an Annuity
If, after reviewing your current retirement plan, you have concerns about possibly outliving your savings, you may want to consider purchasing a delayed annuity.
A delayed annuity provides you a guaranteed monthly payment for your lifetime in return for money invested today. No matter what happens with your investments from other sources, you will be able to count on your income from the annuity.
People are living longer today than they did in their grandparents’ generation. With longer lifespans comes the potential need for in-home care or assisted living. To insure against the possibility of this care exceeding your retirement savings, you may want to purchase long-term care insurance. The earlier you purchase long-term care insurance, the more affordable it will be.
You may think that you have finished retirement planning once you’ve estimated your future monthly expenses, have reviewed all of your income sources, and possibly even purchased an annuity. However, to have the best chance of not outliving your retirement savings, you need to conduct periodic reviews of your retirement plan and adjust as needed.
Having a proper plan for retirement and revisiting that plan often will help you ensure that you have sufficient income to live comfortably for the rest of your life. When you feel secure that you have adequately provided for your needs in retirement, you can get back to focusing on which golf course is the most challenging or plan that long-awaited trip to Paris.