Life expectancy in the U.S. recently hit a new high. According to the National Center for Health Statistics, it’s currently 78.8 years on average—or 81.2 years for females and 76.4 years for males. That’s great news—unless you’re struggling to put money way for retirement. The longer you live the more you’ll need, though there are ways to stretch your nest egg a little further. Consider the following suggestions to help you avoid outliving your retirement savings.
Overestimate your lifespan. Unfortunately, many retirees underestimate how long they’ll live by at least five years—saving less aggressively as a result. They also overestimate how much they can withdraw each year without dangerously depleting those savings. They wind up living on social security and the charity of family and friends.
When calculating your retirement savings needs, it’s best to err on the side of caution and plan to live longer than even your doctor expects you to. Then you’ll be able to make a more informed decision on how much you can spend each year. The advice of a financial planner can be a big help.
Choose a safe pace for withdrawals. Even just a few years ago, many experts considered withdrawing 4 percent each year to be safe. That meant if you had $1 million in your retirement account, you could take out $40,000—plenty for a senior to live on. Your nest egg would last at least 30 years as a result.
Unfortunately, low interest rates, combined with the potential for lower returns in today’s market environment, require an even more cautious approach. You’ll find experts advocating initial withdrawals of 3 percent per year or even less.
Consider an income annuity. Also known as immediate annuities, income annuities involve depositing a lump sum of cash with an insurer who then sends you a monthly payment—for as long as you live—that is not based on market performance. You can check out current annuity rates at www.immediateannuities.com. A 65-year-old woman would receive close to $800 per month for a $150,000 investment at today’s rates.
Of course, when you purchase an immediate/income annuity, you essentially give up access to your money. You cannot tap it to pay for unexpected expenses, nor can you leave it to your heirs. Seek the opinion of a trusted financial advisor before buying.
Take a personalized approach. With the help of a financial planner, you should be able to customize your retirement savings and withdrawals to take advantage of the upsides of various strategies while avoiding their downsides. For example, you could try to cover essential retirement expenses with Social Security and then make up the difference with an immediate annuity—covering discretionary outlays with draws from the remainder of your savings.
This will give you the flexibility to react to changing retirement needs and market conditions—reducing both the chance that you will outlive your nest egg and the possibility that you’ll still be sitting on a big pile of cash when you finally pass on.
Whether you’re still preparing for retirement or have already embarked on that great journey, we’re here to help. Please don’t hesitate to contact us whenever you need retirement planning or other financial advice.
