Your Retirement Savings Can Last for Decades - Learn How

The single issue which concerns nearly everyone on the brink of retirement is how they can be sure the money in their retirement account will last for the remainder of their life.  This is a significant and understandable reason to worry.  No one wants to reach their 80's or 90's and realize they have run out of money.  As a result, AARP teamed up with personal finance expert Jane Bryant Quinn to come up with a simple way to make sure your money lasts as long as you do.

Start with Your Guaranteed Income

Almost everyone in the United States will have a certain amount of guaranteed retirement income, even though it may not be enough for you to completely depend on.  The most common source of this income is Social Security. However, if you worked for a school or government agency, you may have a state or federal pension instead.  In addition, you may have a private pension, an annuity, income from rental property or some other source of regular, reliable income.  If you have not yet retired and your guaranteed retirement income seems to be very small, you may want to work a few more years in order to enhance the amount of guaranteed income you will have for the rest of your life.  At age 70, workers will have maxed out the amount of Social Security benefits they can receive; at age 65, their spouse will have maxed out the amount they can receive in spousal benefits.  There is no point in waiting to collect your benefits past these ages.

If your savings and assets are limited and your Social Security or other pension is small, arrange a personal appointment with someone in your local Social Security office and with your Department of Social Services.  You may be able to increase your guaranteed basic income and benefits by qualifying for Supplemental Security Income (SSI), SNAP (food stamps), or low-cost senior housing assistance.  These extra benefits are available to low income citizens and you have paid for them through your taxes, so there is no reason not to take advantage of them.  If you qualify, they can go a long way towards helping you have a modest, but survivable retirement.  

Total Up the Amount in Your Savings and Retirement Accounts

Once you have worked as long as possible and secured the highest level of Social Security benefits you can, it is time to evaluate how to make the money in your retirement savings accounts last the rest of your life.  If you have been saving a portion of your income in a 401(k) or IRA during your working years, you will be able to use income from that money to supplement your Social Security, pension or other sources of guaranteed income.  Total up the amount of cash you will have to work with upon retirement.

In addition to the money in your retirement savings accounts, you may decide to sell your current residence and downsize to a smaller home when you retire.  In some cases, this move may also give you extra cash which can be used to supplement your retirement income.  There may also be other non-income producing assets you can sell, such as coin collections, jewelry you no longer wear, or similar valuables. Pool together all the cash you can, total it up, and see how much money you will be able to put to work.

Set Aside a Cash Cushion

Take a portion of your cash savings and set it aside for emergencies, upcoming expenses, or large medical bills. If you live another 20 to 30 years after retirement, it is likely you will need to tap into this cushion occasionally to cover surprise bills you may have above your normal monthly expenses.  Sooner or later, you may have to replace a hot water heater or pay a large medical deductible, and you want to be prepared. You do not want to deplete your other assets in order to do this.  Use this emergency cushion carefully. You should avoid burning through it during the first few years after you retire, especially on something like a big trip.

If there is a dream trip you want to take after you retire and you feel you can afford it without wiping out your retirement savings, set aside some travel money at the beginning of your retirement and do not exceed this budget.  Remember, it will be difficult, if not impossible, to replace any money you spend after you retire.  Use those funds carefully.

Invest the Remainder of Your Cash 

Jane Bryant Quinn, the AARP expert, recommends that the ideal way to invest your savings and assure yourself of an income for the remainder of your life is to invest half of it in low-cost index mutual funds or exchange-traded funds that hold stock in large companies and put the other half in Treasury bond funds.  (As an aside, this blog has reported in the past that Warren Buffet also recommends that retirees invest a substantial portion of their retirement savings in low-cost index mutual funds.  It seems like good advice for most people.)

If you are unsure about which investments would be right for you, you may want to purchase Jane Bryant Quinn's book, "How to Make Your Money Last."  It offers excellent advice.  

Follow the Four-Percent Rule

The four-percent rule is one which many financial experts recommend for most retirees.  This system allows you to use four percent of your retirement savings the first year after you retire.  You can increase your withdrawal rate by the amount of inflation each year.  For example, if you have $100,000 invested, you can spend $4,000 the first year.  Then, increase the amount you withdraw by the inflation rate for that year.  If inflation is 3 percent, you can withdraw $4,120 the next year.  Even if the market has ups and downs, this system should assure you that your money will last 30 years or longer, because your withdrawals will be at least partially replaced by the dividends and interest you receive on the principal.

If you decide to avoid the stock market and put your money only in bonds and CDs, you will have a lower return and may have to change the four-percent rule, discussed above, to a three-percent rule.  This works exactly the same, but you start with a lower withdrawal rate of 3 percent.  In other words, for every $100,000 invested, you can withdraw $3,000 the first year.  If inflation is 3 percent, you can withdraw $3,090 the next year.  This very conservative approach is another way to assure yourself that you will have supplemental income for the remaining years of your life.

The one thing you do NOT want to do is to begin retirement by taking more than four percent from your retirement savings, unless you have stock investments which are doing exceptionally well and you feel certain you are not putting your future financial security at risk. Even then, you should not take more than 4.5 percent.  If you withdraw more than that, you must be prepared to also cut back your withdrawals during times when the stock market falls. If you do not want your income to fluctuate in this way, stick to a withdrawal rate of 4 percent or less.

Rearrange Your Lifestyle to Fit Your New Income

Now that you know what your income will be from your retirement savings, add that to your Social Security or pension.  Compare the total to your realistic retirement budget.

If your Social Security and other guaranteed income, when added to four percent of your retirement savings, totals less than your current income, you may have to make some changes to your lifestyle.

As mentioned above, you may need to downsize to a smaller, less expensive home.  The advantage of this is that other housing related expenses, such as property taxes, utilities and maintenance, would also be lower.

You and your spouse may also find it advisable to adjust to sharing one car, or one of you may decide get a part-time retirement job.  You need to make adjustments so your retirement expenses and income match.

If it seems impossible to match your income to your desired lifestyle at the age when you planned to retire, you may decide it would be best to wait to retire until you have paid off your mortgage or until your Social Security benefits or pension would be larger.

It will be much easier and less stressful to start out retirement with a lifestyle which fits your new income, rather than try desperately to maintain your current lifestyle, even when your income and assets do not justify it.   A few hours of planning will save you years of grief in the future.

Make Sure a Surviving Spouse can Maintain this Lifestyle

What happens when you or your spouse passes away?  Will the other spouse be able to survive financially?  Before you finalize your retirement plans, make sure both you and your spouse will be financially secure even after one of you dies.  Calculate the guaranteed survivor income plus the investment income each of you would receive individually after the death of a spouse. Make sure this reduced income will cover the fixed expenses each of you would still have for items such as mortgage payments, property taxes, utilities, car payments, food and medical bills.  If the income of either of you would not be adequate to survive individually, come up with a plan to compensate for the difference.

You may want to start your retirement off by spending even less than the 4 percent rule would allow.  This would allow your assets to grow. Purchasing life insurance policies might also be an option for some couples.  Plan ahead and decide how each of you will deal financially with being widowed. This will reduce some of the stress when the time comes.

Jane Bryant Quinn goes through all this in even greater detail in her helpful book, available here from Amazon, "How to Make Your Money Last." 

Relax and Enjoy Your Retirement

Financial worries have been shown to increase the risk of death, so it is important for every couple and individual to carefully evaluate their situation before retirement.  Once you have made the necessary adjustments so you are confident your money will last the rest of your life, you will be able to relax and truly enjoy your remaining years.

If you want to learn more about financial planning, Social Security, Medicare, where to retire, common health problems and more, use the tabs or pull down menu at the top of the page to find links to hundreds of additional helpful articles.

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How to Draw Down Retirement Assets

As you approach your retirement, one of the first things you may wonder is how to draw down your assets.  How much money can you take out of your IRA, Roth IRA, 401(k) or other savings, investments and liquid assets, and still feel confident that your money will last the rest of your life?  What laws will affect the amount of your withdrawal?  What asset withdrawal system will work the best for you?

Start with a Retirement Budget

The first thing you need to do is carefully list all of your current expenses and come up with an accurate budget.  Next, go through the budget and adjust it to account for any expenses that you believe will be higher or lower after you retire.

For example, if your employer currently pays for your medical insurance, or you have a company car, those expenses may be higher after you retire.

On the other hand, if you currently pay high individual insurance premiums and you plan to use a Medicare Advantage Plan with low premiums after retirement, your medical expenses may be lower.  In addition, if you have high fuel and auto costs due to a long commute, those expenses will be reduced, too.

Don't forget to include the cost of hobbies and travel during your retirement year.  Owning a boat or traveling extensively can add a substantial amount to your retirement costs.

Obtain Accurate Estimates of Your Pensions and Social Security Benefits

Once you have estimated your expenses, you will need to get an accurate estimate of what you will receive in pensions and Social Security benefits.  You should be able to obtain this information from your pension plan administrator and from the Social Security administration.

Compare your retirement expenses to your retirement income.

If there is a gap (and for most people there will be), you will either need to downsize or fill that gap from your liquid assets.

What is the best strategy for doing that?

Required Minimum Distribution Rules

If your assets are in an IRA, you are required to draw minimum amounts from your account once you turn 70 1/2.  The amount you must withdraw is calculated based on your life expectancy, using factors listed in IRS Publication 590.  The owner of an IRA simply divides their total year-end portfolio balance by the life expectancy factor listed for their age.  Each year you will need to repeat this process.  The amount you must withdraw will vary depending on your age and the success of your investments.  The withdrawal percentage increases as you age.

According to Kiplinger's Retirement Report for May, 2015, this strategy out-performs other systems for drawing down your assets.  In addition, if most of your assets are in a traditional IRA, this is the strategy that you are required by law to follow.

Spending Only the Portfolio's Interest and Dividends

For those retirees who have their money invested outside traditional IRA's, in a Roth IRA or investment account, for example, they may hope to leave the principal to their heirs.  As a result, they may decide to only use the portfolio's interest and dividends for their personal expenses.

There are two potential risks with this type of asset withdrawal plan:

1.  They might not have enough interest and dividends to meet their needs.
2.  They might choose stocks based only on their dividends, rather than on whether they are good long-term investments with growth potential.

However, assuming you do not have either of those problems, this system works well for people who hope to leave an estate to their loved ones or to a favorite charity.

The Four Percent Withdrawal Rule

Another option that is simple to follow is for the retiree to simply withdraw 4 percent of their liquid assets the first year and then increase that base amount by three percent of the withdrawal amount each year, to account for inflation.  In other words, if you have $100,000 in assets, you would withdraw $4,000 the first year, $4,120 the second year, $4,243 the third year, etc.

With this plan, it is very unlikely that you would outlive your assets.  Even with only a tiny return on your investments, they should about 25 years.  If you started at age 65, your assets would last until age 90.  If you receive an average return over the years, your assets could last much longer.

However, if you were hoping to leave money to your heirs, it is possible that you would draw down all your assets and there would be nothing left.  If returns remain very low during that period of time and you lived well past the age of 100, it is also possible that you could outlive your assets.

How Should You Draw Down Your Assets?

One factor you will need to consider is how large your retirement deficit is and which asset withdrawal plan will best fill that gap. 

That is why you need to start with a reasonable budget first.  If you know that your gap is going to be larger than you can fill using any of the asset draw-down systems, you may need to make some adjustments to your lifestyle ... perhaps moving to a smaller residence, paying off your mortgage or other bills before retiring, or making additional adjustments.

With adequate retirement savings and a little financial planning, you should be able to retire and not spend your "Golden Year" fretting over your finances.

If you are looking for more retirement ideas, including financial planning, where to retire, medical issues and family relationships, use the tabs or pull down menu at the top of this article.  They will connect you to hundreds of additional retirement articles.

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