Will I Outlive My Savings?

Written by Rick Welch

If you are recently retired or planning to retire soon this is a question that naturally comes to mind.  A volatile stock market combined with low interest rates makes getting the most out of your retirement assets more difficult than ever.  Planning for retirement requires you to make assumptions about your life and the world around you.  Your path to retirement is a personal one with twists and turns that are unique to you and your circumstances. The planning process typically starts with an analysis of your expected sources of retirement income: an investment portfolio, social security, a pension plan, real estate owned, annuities and a possible inheritance.  Focus on the factors that you can control like your retirement date, asset allocation or risk profile, savings at retirement and anticipated spending plan. Understand that there are several important factors like how long you will live, inflation and the performance of the financial markets that are all outside of our control. The objective here is to calculate a withdrawal rate that over a long period of time (say 25 years) should enable you to outlive your savings. Most financial advisors suggest that a sustainable withdrawal rate in the first year of retirement fall between 4% and 5%.  Plan on adjusting your withdrawal rate for inflation in each subsequent year of retirement.

How much do I need to save for retirement?  That is the million-dollar question. Most studies suggest that the keys to retirement savings accumulation are (1) starting early (age 25), (2) saving about 15% of your annual income, (3) investing in a growth-oriented portfolio and (4) retiring at age 67 or older.  At that age, look to have saved about 10 times your pre-retirement, pre-tax income. For example, if your final annual salary is $100,000, then target having about $1,000,000 in savings when you retire. Keep in mind that to maintain your current life style in retirement does not require you to replace your entire paycheck and the money you will live on will not all come from your savings. If we use the same example of someone earning $100,000 in the year before retirement, we see income replacement coming from two sources: about 50% from savings and 30% from social security. The 20% of your income not replaced is because retirement life will offer some lower day-to-day costs, less insurance, a paid off mortgage and most importantly, you will no longer have to save for retirement now that you are officially retired!

Life changes. As it does, so must our retirement plans. As our spending needs or the investing environment changes, we must be able to adapt our plans accordingly. Do not make the mistake of implementing an initial withdrawal strategy and think you are forced to always use that approach. There are several viable strategies, including, fixed percentage amount (which is the most common), fixed dollar amount, inflation-adjusted and withdrawing only investment earnings (dividends and interest). A more creative approach might be to combine strategies to target specific needs. For example, use an inflation-adjusted strategy for essentials and withdraw investment earnings for travel and entertainment. Adjust your discretionary spending based on market performance – spend a little less if the market is down and allow yourself to enjoy that great trip if the market rallies. Remember, withdrawal rates are intended to increase as we age and spend our nest eggs.  A good point of reference on this subject is the IRS required minimum distribution (RMD) guide lines which specify withdrawal rates at different ages including 3.77% (70.5 years old), 4.36% (75 years old), 5.34% (80 years old) and 6.94% (85 years old).

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