Will your retirement savings last as long as you do?
Help put your worries to rest with these suggestions.
By Jean Chatzky
In many of my financial presentations across the country, I often ask, "How many of you are worried about running out of money in retirement?" Invariably, almost every hand in the room goes up. It turns out my unscientific methods are a pretty close representation of some scientific results. In August 2012, the AARP polled almost 2,000 not-yet-retired baby boomers and found that six in 10 fear "coming up short in the later years."
Being one of those boomers myself, I get it. Pensions have become scarce. The viability of Medicare and Social Security are under question. Saving money is simply harder since the Great Recession took hold. And yet, if you are one of those people who fear running out of money in retirement, there are things you can do to help turn the tables in your favor.
Run the numbers.
According to November 2011 research from the Society of Actuaries, people who have reviewed their retirement funds and asset allocation (which you can do with our Am I Saving Enough calculator are generally more confident that their money will last. Unfortunately, the number of people who have taken time to do the math has decreased. By last year, 36 percent hadn't run the numbers, and an additional 10 percent hadn't even thought about it.
Delay, delay, delay.
Working for an extra few years before retirement can help stack the deck in your favor. Every additional year you work and are contributing toward, rather than drawing from, your retirement accounts allows savings in those accounts more time to potentially grow. More time in your job may also mean more time on your organization's health plan and lower co-pays and deductibles.
Bottom line: If you keep working, you can put off taking Social Security, which can be more lucrative for your overall income in retirement. People born in 1943 or later could see as much as an 8 percent bump in their monthly Social Security checks for every year after their full retirement age they wait to draw benefits, until age 70. That's huge.
Create a pension of your own.
Even if company pensions are rare, that doesn't mean you can't create your own. According to the Health and Retirement Study, a longitudinal study from the University of Michigan analyzed by the Employee Benefits Research Institute, people who have a pension or annuity — essentially regular income in retirement — are significantly happier than those who don't.
It just makes sense: By using a portion of your retirement nest egg, you can supplement your Social Security benefit to help enable yourself to live more comfortably in retirement. At the same time, the rest of your nest egg potentially can continue to grow. Remember, funds used to purchase an annuity generally cannot be taken as a lump sum without penalty.
Spend less than 4 percent.
Research has shown that if you can withdraw no more than 4 to 5 percent of your nest egg each year, the money is more likely to last as long as you do.
Keep in mind that 4 to 5 percent are not firm numbers. In years when your portfolio performs better, you may consider drawing more. In years when your portfolio lags, you would likely need to draw less. Otherwise, this strategy will fail you.
Get help from a financial professional.
There are many products available for your retirement savings, from immediate annuities to income-producing mutual funds. And there are many places you can invest your retirement nest egg for both growth and stability.
If you need help figuring out which way to go — and you might — meeting with a financial professional as you head into retirement is a smart move.
If you don't have a financial professional, we can help you find one.
Jean Chatzky is a compensated financial commentator, is not affiliated with any company of the Principal Financial Group®, and the views she expresses are not necessarily those of The Principal® or any member company.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered, and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.