Don’t Run out of Money during Retirement. It’s a Nightmare.
“45% of retirees aged 55-75 have either not calculated how long their assets are anticipated to last during their retirement years or they have never given the issue any thought at all” (Financial Advisor Magazine: June, 2009). This to me is a startling statistic. Almost half of the surveyed population doesn’t plan for the years when they are no longer working? Is retiring one day really not on people’s minds? Maybe it’s not given how poorly the stock market has performed over the past decade. Even so, the time to think about retirement is well before it starts, not once you’ve already decided to permanently quit the workforce.
Entering retirement without a plan can put huge restrictions on your retirement lifestyle. A common mistake made by those who don’t plan properly is overspending given your asset levels at the time of retirement. People don’t realize that the average retiree needs about 80% of their pre-retirement income to maintain a comfortable lifestyle in retirement. Overspending can lead to the unfortunate scenario of running out of money too early and living the meager lifestyle provided by social security checks. And once you’re in this predicament, how can you possibly enjoy your retirement? It is of the utmost importance for individuals to calculate how much they are going to spend each year during retirement, and for how many years they anticipate being retired. Clearly there will be some estimating going on with these figures, so the best idea is to assume a slow rate of growth on your investments and a fast rate of growth on your annual spending. You should also assume you’ll live well into your 80's or 90's since longer life spans seem to be the trend. By planning conservatively, your financial plan will have a better chance of working. From these numbers, one can figure out with a reasonable sense of security how much money they will need to retire on.
Something else to consider well before entering retirement is what your ideal retirement age is. Along the same lines, how much longer will you be willing and able to work? Have you factored future economics ‘dips’ into your plan? Recessions, such as the one we’re actively recovering from, can unexpectedly hurt your retirement plan and force you to spend more time in the workforce. This can be particularly painful if the economy has a rough patch around the same time that you plan to start taking distributions from your investment accounts. A growing trend in light of all these moving parts is a ‘transitional retirement’ in which people work part time and eventually retire completely in their 70’s, rather than in their 60’s.
If you’re approaching retirement without a plan, a good idea is to start planning right now. Structure a worksheet (I use Excel) which shows your total expected income over the next 30 years, followed by your expected spending and you should be able to see if and when you’ll fall short. In your income section, categorize separately earned income, guaranteed income, social security and income from investments. This will help you better understand what is variable and what you can rely on. In expenses, build in at least a 3% increase annually since you rarely spend less than you anticipate. I like to put in a column for required distributions (from IRA accounts) as well since you’ll often need to take a certain amount out each year after you turn 70 ½ . If you find that you can’t hit your expected annual spending rate, you may have to keep saving and investing, or have one of these “transitional retirements” which I’ve mentioned above. You may also be able to consider certain investment products which provide income guarantees, although you’ll want to learn more about the fees, expenses and rules of such products before jumping in.
You can also e-mail me, since I spend lots of time creating financial plans and investment portfolios for retirees.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.