There’s no shortage of things to worry about when it comes to your retirement security: inflation eroding your purchasing power; health care costs breaking your budget; market slumps wreaking havoc with your investing strategy.
But one concern looms especially large: depleting your nest egg prematurely.
When Allianz recently asked some 3,000 people which they fear most — death or outliving their money in retirement — nearly two-thirds chose running out of dough over meeting the Grim Reaper.
Personally, I doubt whether people would actually feel that way when push comes to shove. But trepidation about spending down one’s savings too quickly is definitely a legitimate worry.
After all, many people simply haven’t saved enough to maintain their current lifestyle in retirement. Based on figures from the Federal Reserves’s 2016 Survey of Consumer Finances, the Boston College Center for Retirement Research estimates that the median combined 401(k) and IRA account balance for working households nearing retirement was $135,000. That’s about enough to generate just $600 a month in lifetime income for a couple.
And even those who’ve managed to save much more still face the challenge of ensuring their assets will last throughout retirement.
Fortunately, meeting that challenge is doable, if you go about it the right way. Here are three things you can do to tilt the odds in your favor:
Understand just how long you’ll be relying on your savings.
It’s hard to pace your spending correctly if you don’t have a realistic idea of how many years you’re likely to be around. But research shows many people don’t.
For example, 61% of those surveyed for a recent Financial Engines study underestimated the life expectancy of a 65-year-old man by five or more years.
Overall life expectancy isn’t even the right metric for gauging how long your money will need to last, because many people will live beyond, in some cases well beyond, the average life expectancy for people their age.
So how can you get a decent sense of how long you might live and thus how long you should plan for your savings to last?
One way is to go to the Actuaries Longevity Illustrator tool. Plug in such information as your age, sex and an assessment of your health status (poor, average or excellent) and the tool will gauge how likely you are to live to various ages.
For example, the tool shows that a 65-year-old non-smoking man in excellent health has a 42% chance of living another 25 years to age 90 and a 22% probability of living another 30 years to age 95. A woman of the same age and health characteristics has a 53% chance of making it to 90 and a 32% chance of living to 95.
These stats won’t tell you how long you specifically will live. But with this sort of information in hand, you can at least make some reasonable assumptions about how many years your nest egg may need to support you.
Tap your nest egg at a ‘reasonable’ rate.
The big question here, of course, is: What’s reasonable? For years, experts touted “the 4% rule.” The idea was that if you withdraw 4% of your nest egg’s value the first year of retirement and then increase that dollar amount each subsequent year by the inflation rate, your savings will last at least 30 years.
But given today’s low bond yields and projections for relatively anemic investment returns over the next decade or so, some retirement experts say retirees may need to ratchet back their withdrawal rate to 3%, if not lower.
Fact is, there are too many unknowns — how long you’ll live, what your actual expenses will be, how the markets will perform — to know exactly what withdrawal rate will work out best.
Which is why if you want a decent shot that your money will support you 30 or more years, a reasonable strategy is to start with a withdrawal rate somewhere between 3% and 4%, and then be prepared to raise or lower withdrawals based on market conditions and your nest egg’s current balance.
So for example, if your retirement account balance drops significantly because of a market slump or higher-than-expected spending in a given year, you may want to pare withdrawals to give your nest egg a chance to recover. If, on the other hand, the value of your savings stash balloons because of strong investment gains, you may want to spend more liberally for a few years.
You can take a systematic approach to adjusting withdrawals or you can play it by ear, so to speak, by periodically going to a tool like T. Rowe Price’s Retirement Income Calculator and seeing how many years your savings are likely to last if you continue withdrawing money at your current pace and then raise or lower withdrawals as necessary.
But the main idea is to stay flexible so that you don’t go through your savings stash so quickly you have to scrimp late in retirement or so slowly that you end up with a big nest egg in your dotage and wish you you’d spent more freely and enjoyed yourself more early on.
Consider buying guaranteed income.
If you’re really worried about running out of money in retirement, there’s a simple way to ensure you won’t: Convert a portion of your savings to income you can’t outlive.
One way to do that is devote a portion of your savings to an immediate annuity. A 65-year-old woman who invests $150,000 in such an annuity would receive about $775 a month that would start immediately and last the rest of her life.
If you think you think you’ve got enough income for now but want to be sure you won’t run short later on, you can invest in a longevity annuity, a type of with payments that start in the future. For example, a 65-year-old woman who invests $50,000 in a longevity annuity today would begin receiving lifetime payments of $1,390 a month beginning at age 85. (To see how much you might receive based on your sex, the amount you plan to invest and when you want payments to begin, you can go to the annuity payment calculator in RealDealRetirement’s Retirement Toolbox.)
Keep in mind, though, that in return for guaranteed income you typically no longer have access to the money you invest in these types of annuities. So you’ll want to be sure you have enough savings in a diversified portfolio of stocks and bonds plus a cash reserve that can provide both liquidity and a hedge against inflation.
Remember too that you’ll also be receiving guaranteed lifetime income from Social Security. If those payments, plus income from any pensions, is enough to cover all or most of your basic living expenses, you may not need additional income from an annuity. Similarly, if your nest egg is so large that your chances of exhausting your nest egg too soon are minuscule, you may not need an annuity.
For more on the pros and cons of annuities and how to make on part of a retirement income plan, check out this column on choosing the best annuity for lifetime income.
There are certainly other things you can do to reduce your chances of outliving your savings. Building as large a nest egg as you can during your career, doing a retirement budget before you retire, ensuring you have adequate resources before you pull the trigger on retirement in the first place—all these can help.
But if you really want to avoid running out of money before you run out of time, focus on the three tips above.