Worried about retirement income? In a recent survey by the American Institute of Certified Public Accountants, 41% of CPA financial planners said that running out of money was their clients’ top financial concern when planning for retirement, and fully 70% said depleting savings ranked among their clients’ top three worries, along with maintaining their current lifestyle and rising health care costs. And yet…other research shows that many people apparently aren’t alarmed enough about this risk to seriously plan for it. According to TIAA’s 2016 Lifetime Income Survey, fully 65% of American adults haven’t even figured how much income they can expect to have each month after they retire.
Here are three key things you can do to increase the likelihood you’ll have sufficient retirement income:
- Begin planning early. You should start focusing on how much income you’ll need at least five or more years before you expect to retire. Many people assume that their spending—and thus the income they’ll require—will automatically drop after retiring. But that’s not necessarily the case. The best way to get a fix on your likely spending is to make a detailed retirement budget.
The years leading up to retirement are also a good time to begin thinking about lifestyle issues, as they can directly affect your income needs. If you are considering selling your home and moving to a smaller residence you’ll definitely want to check out the real estate market in your area well in advance to make sure downsizing actually makes financial sense. Similarly, if you’re counting on collecting extra income by working part-time after you retire, it’s a good idea to see what kinds of jobs are available for someone with your qualifications and what they pay.
By getting a head start on your planning rather than waiting until you’re on the verge of retirement, you’ll be better able to assess whether you’re really as prepared to retire as you think, or whether you might be better off staying on the job a bit longer.
- Develop a more detailed strategy as you near retirement. As you get closer to retirement, step up your planning efforts. One critical issue is whether to postpone taking Social Security benefits to qualify for the higher payment you’ll receive for each year you delay. The answer will depend on such factors as how long you expect to live; the rate of return you think you can earn on your retirement investments; and, if you’re married, whether you and your spouse might be able to maximize benefits by coordinating when each of you claims.
You’ll also want to settle on an appropriate withdrawal rate for tapping your nest egg. The idea is to get enough income from savings so that the money you pull from your nest egg, combined with Social Security, will allow you to maintain an acceptable lifestyle in retirement. At the same time, you don’t want to withdraw so much that you run the risk of going through your savings too soon.
With yields today so low and many investment pros expecting anemic investment returns in the years ahead, an initial withdrawal of somewhere between 3% and 4% of savings that is subsequently adjusted each year for inflation is probably about right if you want your savings to last at least 30 years. You can estimate how long your savings might last at a variety of withdrawal rates given your age, how long you expect to live in retirement, and how your retirement assets are invested by plugging numbers into a retirement income calculator found online.
- Be ready to adapt to changing conditions. A retirement income plan, no matter how carefully thought out, isn’t something you can create and then set on autopilot for the remainder of your retirement. You could incur large unexpected expenses; your investment might perform better or worse than expected; your lifestyle and spending needs could change. You will need to continuously monitor your plan to be sure it’s still on track and, if not, make the necessary adjustments to bring it back in line.
For example, if the combination of withdrawals and a severe market downturn so depresses your portfolio’s value that you’re in danger of depleting your nest egg prematurely, you may want to scale back withdrawals for a few years. Conversely, if superior market performance over several years has caused the value of your assets to balloon, you might consider treating yourself a bit. Take that trip, or buy that item you’ve always wanted. Periodically revving up a tool like the withdrawal calculator I mentioned above can help you assess whether you need to tweak withdrawals.
If you feel that creating and monitoring a retirement income plan is more than you can handle, you can always get assistance. But when it comes to something as important as turning a lifetime of savings into income you can depend on throughout retirement, you don’t want to wing it. You need to come up with a plan.