Smart Ways to Avoid Outliving Your Money
Plan now so you're financially prepared for retirement
A 50-year-old man today has a projected average life expectancy of 82; for a 50-year-old woman, it’s 85, according to the Social Security Administration. And in the future, healthy adults are expected to live to 90 or 100.
Are you financially prepared to live that long? If not, you’re far from alone.
The Employee Benefit Research Institute reported last year that 56 percent of Americans saving for retirement had less than $25,000 in savings and investments (excluding the value of their primary residence and any pension plans). The difficulties so many people have saving for retirement is “a dire subject and under-discussed,” says Christine Benz, director of personal finance at Morningstar, the investment research firm.
But there are a few things you can do to help you avoid outliving your money in retirement:
“It’s a cliché, but it really is never too late to plan,” says Todd Terhorst, president and managing partner at Diversified Wealth Management LLC in St. Louis Park, Minn.
And retirement planning today should include a kitchen sink of such issues as: Whether you’ll need or want to work in retirement, whether you have chronic or end-of-life health issues, whether you’ll need to support aging relatives or out-of-work adult children, and when to start claiming Social Security.
Terhorst recommends putting yourself on “a five-year clock” and start cutting expenses five years before retirement. That way, you’ll find it easier to live on your retirement savings when the time comes.
Work with these experts to answer four key questions, as well as bearing in mind the answers to the "kitchen sink" issues mentioned above:
- How much money will I need to live on in retirement?
- How much money will I want to withdraw from savings each month in retirement?
- How much money will I need in total savings when I retire so I’ll be able to withdraw that amount each month?
- What types of lifestyle changes will I need to make in retirement so I’ll be able to live on my savings and other retirement income?
In the 1990s, financial planner William Bengen crunched some numbers and concluded that the average person retiring at 65 could draw down as much as 4 percent annually from a balanced portfolio of stocks and bonds without fear of outliving his or her money. And most financial planners followed that rule for their clients.
But today experts increasingly believe that the sluggish investment climate, low interest rates on savings, the unpredictable employment market and increased longevity make such blanket guidelines unrealistic for many people. Instead, they say, you need to add up your current retirement assets, project what they’ll be when you begin retirement (a good online retirement calculator, like Choosetosave.org’s Ballpark E$timate, can help) then work with an adviser to come up with a realistic annual drawdown rate for you.
One way to increase the odds that your money will last your lifetime is by using what’s known as “the three-bucket” approach. The “buckets” represent the broad categories of investments for a portion of your retirement savings. Diversifying your retirement portfolio into these buckets will help immunize you against fluctuations in the stock and bond markets, so your money will be there when you need it.
In general terms, here’s what a bucket plan looks like:
Bucket No. 1 is the money you can get your hands on easily, for day-to-day expenses. Think of things like your bank accounts, bank CDs and money market funds. This bucket can be filled, in part, from money you earn by working in retirement and from Social Security.
Bucket No. 2 is the bulk of your retirement investments, with a mix of stocks, bonds and cash.
Bucket No. 3 is money you’re investing aggressively – mostly in stocks -- to provide a cushion that will help you handle heavy health care expenses in retirement.
While you could set up and manage a bucket system on your own, it’s probably a good idea to do it with a financial planner. “You don’t make decisions like these and put them on autopilot,” Terhorst says. “Clients need to be reviewing this mix every year.”