Many Americans do not realize one of the greatest risks to their financial security in retirement might be outliving their money.
According to pension mortality tables, at least one member of a 65-year-old couple has a 72 percent chance of living to age 85, and a 45 percent chance of living to age 90. This suggests that many of us will need to plan carefully to ensure we don’t outlast our assets.
The first step in tackling longevity risk is to figure out how much you can realistically afford to withdraw each year from your personal savings and investments. You can tap the expertise of a qualified financial professional to assist you with this task, or you can use an online calculator to help you estimate how long your money might last.
Our trade journals are packed with articles on this subject, and the industry truth is that there is still a lot of debate when you are projecting 30 or 40 years into the future. Clients also have their own philosophy on the subject.
One strategy to help make your money last is to withdraw a conservative 4 percent to 5 percent of your principal each year. However, your annual withdrawal amount will depend on a number of factors, including the overall amount of your retirement pot, your estimated length of retirement, annual market conditions, inflation rate, and your financial goals.
For example, do you wish to spend down all of your assets or pass along part of your wealth to family or a charity?
No matter what your goals, there are ways to potentially make the most out of your nest egg. Here are a few suggestions:
• Start a cash reserve fund. You’ll likely need ready access to a cash reserve to help pay for daily expenditures. A common rule of thumb is to keep at least 12 months of living expenses somewhere very available. Then, consider refilling your cash reserve bucket on an annual basis by selectively liquidating different longer-term investments, timing gains and losses to offset one another whenever possible.
• Be aware of interest rates. Responding to the current interest rate environment is one way to potentially squeeze more income from your savings and stretch out the money you’ve accumulated for retirement. For example, if rates are trending upward, you might consider keeping more money in short-term certificates of deposit. The opposite strategy may be employed when rates appear to be declining.
• Look into income-generating investments. Most retirees need their investments to generate income. Bonds and dividend-paying stocks might help fill this need. “Laddering” of bonds – purchasing bonds with varying maturity dates at different times – potentially can create a steady income stream while helping to manage long-term interest exposure. Dividend-paying stocks potentially offer the opportunity for supplemental income by paying part of their earnings to shareholders on a regular basis. There also are annuities available today that guarantee income. That said, don’t be overly obsessed by investment income. With today’s low rates, your cash bucket will earn very little, and rising rates will challenge the bond market. There is nothing wrong with a strategy focused on creating capital appreciation, selling the asset and living on those proceeds. After all, it’s really just a pot of money you are trying to make last your lifetime.
Putting together a coordinated retirement requires a comprehensive plan. Don’t put the cart before the horse. Create a reasonable plan to follow, and make investments appropriate to complete the plan.
• Timothy J. Dooley, CFP®, is president of Comprehensive Retirement Resources, Inc., an independent firm located at 201 N. Draper Road, McHenry. His number is 815-578-4217. Tim specializes in retirement and estate planning. He offers securities through Raymond James Financial Services Inc., member FINRA/SIPC. Views expressed are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. You should discuss any tax or legal matters with the appropriate professional.