How Long Will My Retirement Savings Last?

Feb 26, 2022

How Long Will My Retirement Savings Last?

There are options galore to choose from when it comes to investing your money for retirement. There are also tools available at your disposal to crunch numbers towards your savings goal. All of these are great to have until it comes down to reality. No matter how much you plan, these are just estimates.
 
The planning stage of retirement is beneficial to growing your money, but what happens when you are face-to-face with retirement and need to begin withdrawals?
 
You can plan for this too by knowing your withdrawal options and seeing which may work best for your lifestyle.

How Much Should You Plan To Withdraw From Your Retirement Savings?

This feels like the million dollar question. No matter how much money is saved, people still want to know how much money is enough to cover their expenses during the era of retirement.
 
Here’s a couple of questions for you to think about:
  • How long do you plan to use your retirement savings? No, this is not a trick question and rightfully so, there’s no firm answer and it’s not something people want to think about. But having an estimate can help you build a safety net into your retirement savings plan.
 
  • What are you investing in? This question is more straightforward. Look at your portfolio. Is there a healthy balance between stocks, bonds, mutual funds, ETFs, etc.? Each plays a role to build and grow your savings. For example, stocks provide growth potential while bonds balance the portfolio, adding stability. You may even have commodities to hedge inflation.
 
  • Do you want to be conservative with your withdrawals? Looking at your retirement plan, where would you rate your level of confidence that your money won’t run out? Between 75% and 90% is an average range, meaning you are open to being flexible with your spending and plan to adjust it where needed. Anything greater than 90% tells us you shouldn’t run out of money and intend to kick your feet back during retirement with little plans of spending.
 
  • If the market or other conditions change, are you open to making changes too? Life happens before and after retirement, we can’t change that. If the value of your retirement plan shifts, or unplanned expenses come barking at your door, are you willing to make adjustments to your lifestyle? This could mean postponing a vacation, or reducing your spend on items you want but do not necessarily need. If so, a slight alteration could be enough for your money to last through retirement.
 
The total withdrawal amount you anticipate during retirement depends on how you plan to live. Try using a return calculator as a guide.
 
Some people want to travel the globe, others are content within the limits of their own home. WIth that said, you need to decide how much you’ll need to cover your future planned and unplanned expenses. Only then can you determine how much you’ll require or be able to withdraw at the age of retirement.

How Can You Extend the Life of Your Savings?

Whether you are ready to withdraw from your retirement savings now, or devising your savings plan early, it’s a good idea to know your options for withdrawal.
 
Strategizing the way your money is withdrawn each year is for your benefit. You want to keep a strong safety net with the assurance of having income for the remainder of your life.

The 4% Rule

The 4% rule dictates that the retiree withdraw 4% of their portfolio in the first year of retirement. Every year thereafter, the withdrawal is adjusted for inflation.
 
The 4% rule has been around since 1994 when a man by the name of WIlliam Bengen, a financial advisor, decided to challenge a withdrawal method to prove that his vision of a 4% rule was enough to stretch retirement savings to last for a person’s life (roughly 30 years).
 
Bengen’s research focused on historical withdrawal rates dating from 1972 to 1976. He then applied these to various portfolios, using a baseline of 50% stocks and 50% bonds to test the effects of his hypothesis.
 
Over the years, this rule has been updated. It suggests an increase or decrease of 0.1% for every five year adjustment for retirement.
 
For example, if retirement savings needs to last 35 years, Bengen recommends a withdrawal rate of 4.3%. Stretching it to 45 years would decrease the rate to 4.2%.
 
Bengen’s 4% rule focuses on a 30 year retirement, but do you know how long you will live? That’s the missing piece to the formula. No one knows this, unless you have a crystal ball. You may live less than 30 years, or you may live more than 30 years. This is where the rule becomes flawed.
 
Is it guaranteed that you will not run out of money during retirement using the 4% rule? Unfortunately, nothing is guaranteed but it is fair game. With the research guided by the past, it’s not possible to predict the future.
 
The market has a mind of its own, changing at any moment. That change can either make or break a person’s retirement savings.

Asset Allocation

What does your portfolio's asset allocation look like? This may be something you are actively managing yourself, or you may have a brokerage firm doing the work. Regardless, knowing what you are investing in is important and it may need to be shifted over the years for maximized return.
 
To extend your retirement savings, there are asset allocation options available which include:
  • Designating a target-date fund - These funds are built with a retirement target date objective. With this type of investment, a fund manager is responsible for adjusting the investments for optimal growth and preserving your wealth.
 
  • Two-fund portfolio - This includes selecting two types of either index funds or exchange traded funds (ETFs), focusing one on stocks and the other on bonds initially. With a two-fund portfolio, the mix will gradually shift over time to allocate more towards the bonds.
 
  • Custom portfolio - The sky’s the limit here. A custom portfolio is crafted by you, making it a hands on experience as you pick and choose from stocks, bonds, mutual funds, ETFs, and more.

The Income Floor Strategy

This strategy is an essential approach. Having a secured income, especially during retirement, is what people seek and that is what the income floor strategy is for.
 
The floor is the foundation and the foundation is your income. You need enough income to cover the estimated costs you expect to incur each year during retirement. What type of income? Look for sources outside of the stock market such as:
  • Pensions
  • Bonds
  • Annuities
  • CDs
  • Social security
The stock market can change quickly, these sources of income combat those changes providing you with an inflation-adjusted source over your lifetime. Don’t overcommit yourself to one option, though, and research before you pursue so that you do not pay ridiculous fees, commissions, etc.
 
As with any method, income flooring is not built for everyone. This strategy appeals to those investors who are generally more risk averse. They worry about things such as their spending habits, poor market returns, expending their portfolio too soon, and simply not being able to pay for their estimated expenses.

Additional Considerations

Your retirement savings covers your expenses, so here’s a challenge. Can you reduce your planned expenses now so that you don’t need to worry about them in the future, or find ways to maximize retirement income through the government? Here are a few things to consider:
  • A mortgage-free retirement - free up your cash flow during your younger years so that you don’t have to worry about a monthly mortgage payment during retirement.
 
  • Wait on social security - hold on taking your social security, if you can. Use it as a safety net in your back pocket. Accepting the benefits at age 62 greatly reduces the amount you’ll receive in the future. The longer you wait, the greater the benefit you’ll receive.
 
  • Fixed annuity - if you are worried you won’t have enough money to live on, this can be an option as it guarantees a return on your contributions over a period of time. These are purchased from insurance companies, banks, and brokers. Reach out to your financial advisor for more information.

The Bottom Line

Planning for retirement is a guessing game, planning for the expected and unexpected. Sure, we all want to live a lifetime but what does that mean for each of us individually? The answer remains unclear. The best we can do is build a retirement savings and plan so that our income covers our expenses.
 
Saving for retirement shouldn’t leave you at risk or make you feel that you are gambling your money. LifeGoal Investments offers ETF options designed to give you the long-term growth you deserve. Money doesn’t grow on trees, it takes time to grow. Slow and steady growth may not be exciting, but it is beneficial.
 
Sources:
How To Make Your Retirement Savings Last | Forbes Advisor
7 tips to make retirement savings last | USA Today
The Four Percent Rule | Does It Work or Are There Better Options? | Annuity.org
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