Days, years, and months seem to go by faster and faster as you grow older. Retirement can come faster than you know it. Is there a way to know how long your retirement income will last?
According to recent studies, only 37% of people in the United States are contributing to a viable retirement plan.
Whether you are waiting until the legal age to retire or have a nest egg for early retirement, it’s best to plan ahead and have an idea of what you’ll be able to afford.
Do You Have a Retirement Budget?
Fear is contagious. Many people have it, especially when thinking about retirement and the question of, “How long will my money last?”
Do your due diligence and prepare a retirement budget to escape your fear of falling short. You can use resources like financial calculators and rate of return calculators to find out your average annual expenses and average monthly income.
A budget dictates the future, acting as a guide to best prepare you for the expected and the unexpected.
Creating a Retirement Budget
Whichever method you choose (pen and paper or excel worksheet), take control of your retirement by creating your budget.
Here are some helpful tips:
- Examine your income. This is not your salary today or current cash flow, but the estimate of how much your monthly withdrawal amount and projected savings balance.
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What do you know you’ll need to spend? For example, if you have a mortgage or rent, write that in. Also include monthly recurring expenses such as utilities, home, auto, health, and life insurance, income taxes, monthly social security deductions, auto loans, groceries, and credit card debt payments.
Don’t forget about annual expenses, too! You may want to amortize those monthly with help from a financial advisor so that they don’t get left behind or shock you when the bill comes in.
- Are there significant changes you anticipate? During retirement, do you want to buy a new car? Do you want to take out a home equity loan from a local lender? Do you want to switch your insurance company or sign up for different brokerage services for investment advice? Maybe you want to relocate to a new house in-state or move out of state.
- What is your expected bottom line? After laying out your estimated income, fixed expenses, interest rates, and variable ones, are you in a positive or negative position? A budgeting tool comes in handy here. Many options via the web, apps, and software can help simulate your financial situation.
- Does your budget work? You won’t know until you try. Why not try it out before you retire to work out the kinks? Maybe you’ll realize you are ready for retirement sooner than expected? Or, you’ll determine where you can add growth to your savings.
What Are the Risks of Running Low on Retirement Savings?
Below are a few of the leading factors attributed to running out or running low on retirement:
- People outlive their savings
- An employer moves from a pension plan to a retirement savings account — or to no retirement savings account.
- Healthcare costs
- Market risk
- Family situations ( the death of a family member, or assisting family members in need)
- Lack of social security benefits (the age requirement continues to increase to claim full benefits)
How Do You Save for Retirement?
Before you decide to put your money aside for retirement, look at your current financial situation. What does it look like? Do you have a lot of debt obligations? Do you have an emergency fund set up in case of unforeseen expenses?
Just like a leader wants to set up their team for success, you should do the same. The earlier, the better, taking advantage of compound interest and tax breaks.
Once you’ve checked off the boxes and have the extra income each month, it’s time to build up your retirement fund.
Make Contributions to a 401(k)
Many employers offer their employees retirement savings accounts. They may even match a percentage of your contributions! This includes 401(k), 403(b), 457 plans, and the federal government’s Thrift Savings Plan (TSP).
Contribution limits are subject to change each year. For 2022, the maximum contribution to a 401(k) is $20,500, with an annual catch-up contribution of $6,500 for people ages 50 or older.
If your employer doesn’t offer a 401(k), you still have options, like an IRA or an investment portfolio.
Open an Individual Retirement Account (IRA)
There are two types of IRAs:
- Traditional IRA
- Roth IRA
In 2022, you can contribute up to $6,000, with an annual catch-up contribution of $1,000 for people age 50 or older.
The primary difference between them is how they are taxed.
Traditional IRAs do not subject you to paying taxes until the time of withdrawal. Roth IRAs use after-tax dollars, leaving your withdrawals tax-free (as long as the account is open for a minimum of 5-years).
Keeping a Diversified Investment Portfolio
Don’t you just love going to a buffet and choosing from a variety of dishes? That is how a diversified portfolio should look. You get to hand-pick the securities that will affect your financial future.
Make your portfolio as colorful as your dinner dish, selecting from common securities such as:
- Stocks
- Bonds
- ETFs
- Mutual Funds
- Real Estate
- Index Funds
Add commodities to the list, too, like gold. Gold can balance the scale, hedging against inflation. For example, if the market suffers or the economy fails, the value of securities traded on the market may decline — gold trends in the opposite direction.
What Is the 4% Rule of Retirement?
If you want to stretch your savings for as long as possible, the 4% rule is a strategy worth trying.
William Bengen, a financial planner, developed the 4% rule in 1994. He researched activity from 1926 to 1976, analyzing the behavior of withdrawal rates and their association with retirement portfolios.
Here’s how it works:
- Assuming that an individual has a retirement portfolio filled with 50% stocks and 50% bonds, they would withdraw 4% of their savings during the first year of retirement.
- In the second year of retirement (and every year after that), they would adjust their withdrawal for inflation.
It’s a simple concept, provided that the funds would last a minimum of 30 years. However, that’s dependent on the market's stability — and predicting the future is impossible.
Is 4% Realistic?
This rule might not be as realistic as it once was.
Bengen has updated the 4% rule, suggesting that 4.5% is more practical in the first year.
What Is the Dynamic Withdrawals Strategy?
A more flexible strategy to consider is the dynamic withdrawals strategy. Instead of a fixed distribution as the 4% rule suggests, they can be adjusted.
This strategy is beneficial, especially during economic downturns. You remain in control of your money, taking out more when your returns are at their highest and less when there is turmoil.
What Is the Bucket Strategy?
Imagine a house full of children’s toys all over the place. The quickest method for cleanup would be organizing them into piles (or buckets) before putting them away.
The bucket strategy is similar, compartmentalizing your money.
Instead of toys, imagine your expenses. What types of expenses fit together into one bucket? Once you know, pool the money together to cover those expenses and deposit it into one account.
Continue to open accounts for each of your expense buckets. Though this may not earn you the most interest or return, it keeps your cash on hand instead of tied up in stocks or other investments.
What Is the Income Floor Strategy?
The income floor approach focuses on a secure income versus a risky investment portfolio. You’ll need to broaden the horizon and look outside of the stock market to do so.
Here are some of your options:
- Annuities
- Pensions
- CDs
- Bond ladders
Of course, you can also add social security income to this list. Social security does adjust year over year for inflation, making it “stable.” There are concerns, however, about the future funding of the program.
With the income floor strategy, you build a solid base to live off, one that is not subject to drastic changes due to economic factors.
Is it for everyone? No, but it is suitable for people who:
- Prefer to avoid risks
- Are worried they may outlive an investment portfolio
Combine this approach with others, keeping your overall portfolio diversified.
The Bottom Line
For your retirement savings to last, you’ll need to know when you want to begin your retirement, how much will be in your retirement savings, and what expenses you plan to incur during retirement.
Don’t get caught up in one traditional savings account to save for retirement. Retirement savings accounts benefit from compound interest. That means you earn interest on interest earned, making a difference year after year.
Adding gold to your investment portfolio adds diversity. Gold comes in physical forms, such as bars or coins, but you can also purchase stocks, ETFs, and futures contracts.
Visit Acre Gold to explore subscription-based gold ownership options. Once the value of the bar is met, it’s yours — and it’s delivered straight to your door!
Sources:
How to Create a Retirement Budget | Baby Boomers | US News
Income Flooring: Is Annuitization the Right Strategy? | Society of Actuaries