Many Americans worry about whether they will outlive their money in retirement. This concern is understandable. Just the thought of going broke after decades of working hard, and not being able to fix the problem, because very few companies will hire a person of advanced age is enough to cause sleepless nights. To help you avoid this situation, here is a roadmap for making your money last through retirement.
Since people ask them about this problem frequently, financial experts have come up with key strategies for making your money outlast you. The four components are:
Add Up the Income You Can Count On
Start with Social Security and add to that all of your guaranteed income. This category can include things like a pension, annuity, or net rent (after all expenses) from reliable rental property. If you do not yet receive Social Security retirement benefits, you can call the Social Security Administration (SSA) or set up an online account for yourself (a My Social Security account) at the SSA’s website, (ssa.gov) to estimate your Social Security retirement benefits.
Your Safe Number to Withdraw from Savings
With interest rates fluctuating and the stock market going all over the place, it can be exasperating to try to calculate how much money you can withdraw safely from your retirement savings, without running out of money down the road. You can stop banging your head against the wall. Financial planners have a formula.
Get the total value of all of your liquid assets – things that are cash or that you can easily convert into cash. These assets include checking and savings accounts, money market accounts and investments like mutual funds, stocks and bonds. You should include your retirement accounts and other savings and investments.
Once you have that total, deduct a ”buffer” amount for several months’ worth of living expenses. That year, you can withdraw four percent of the amount that remains.
Here is how it works: If your total liquid assets minus the cash cushion equal $200,000, you can spend four percent ($8,000) that first year. The second year, you can withdraw a little more if there is inflation, but make sure that you do not confuse the formula on how to adjust for inflation.
Let’s say inflation is two percent. In year two, you can withdraw and spend four percent of your total liquid assets plus two percent for inflation. That does not mean you should spend six percent of your total liquid assets. It means you can spend $8,000 plus $160, which is two percent of $8,000.
Add Your Guaranteed Income and Your Spendable Amount
You can calculate your total income, by combining your Social Security and other guaranteed income with your “safe” four percent to withdraw. If you get $24,000 from Social Security and your four percent to withdraw from savings is $8,000, your total income is $32,000 a year.
Set your budget around this amount. If you can keep your annual spending at or under your total income, you should have enough money to last you for your lifetime.
Be aware that some economic fluctuations might require you to withdraw less money from your savings in some years, and things like a medical crisis can increase your expenses.
Every state has different laws, so be sure to talk with an elder law attorney near you to find out how your state’s regulations might vary from the general law of this article.
AARP. “4 Steps to Make Your Money Last a Lifetime.” (accessed January 25, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/make-money-last-lifetime.html