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Talks about retirement savings tend to begin with the question of whether you’re saving enough for your golden years.
But retirement planning is not just about starting and growing a nest egg. You also have to make sure your savings will last through your retirement years. Imagine putting away money diligently for retirement all these years and riding off into the sunset with a handsome nest egg, but then only to find yourself running out of money halfway through retirement.
This is the kind of plot twist we don’t want to see.
Making sure that the money lasts through retirement is important given that you could spend anywhere between 10 to 40 years (more or less) in retirement.
Broadly speaking, market volatility, unnecessary investment risks and spendthrift habits (where you’re withdrawing more from your retirement account than you need to) are some of the challenges that could chip away your retirement savings.
The good news is there are some things you can do to help ensure that the money lasts for as long as you need it.
1. Pay attention to retirement account withdrawals. As you begin to lean on your retirement savings for income, keep an eye on how much and how often you’re withdrawing from your accounts. Why is your withdrawal rate important?
First, spending too much too quickly increases the chances of you outliving your savings. Sticking to the spending budget you’ve made for your retirement years is key to avoiding overspending.
Second, withdrawing more money than you need from your accounts in the early years of retirement can sap your investments’ ability to weather economic downturns as well as their potential to deliver sufficient growth over time.
When it comes to figuring out how much to withdraw from your retirement savings, financial experts generally recommend following the 4% rule. This is where you withdraw no more than 4% of your savings in the first year of retirement. Then in the years after, you may adjust the withdrawal amount to account for inflation.
This isn’t a hard and fast rule. Each person’s financial situation is unique. The smart thing to do is to talk to a financial expert to come up with a withdrawal plan that’s based on your budget, investment portfolio and tolerance for risk.
2. Review investment allocations. When you’re in retirement, generally, the mix of investments (or asset allocation) in your retirement accounts should be made up of less risky assets. One way to think about this is perhaps holding more bonds and fewer stocks in your portfolio.
Because your asset allocations can shift over time, it’s important to regularly check in on your allocations during retirement to make sure your investments are not exposed to more risk than you’re comfortable with.
3. Consider contributing to your HSA. Keep putting money into your Health Savings Account (HSA) during retirement if you can. Under IRS rules, generally, to qualify for an HSA, you must meet these requirements:
If you qualify, having a dedicated account for covering certain medical expenses can be helpful. It could save you from having to reach into your retirement accounts to pay for these expenses. Remember also that HSA contributions, up to a specific amount, are tax deductible, which can help lower your tax bill.
4. Don’t forget about cash savings. Hopefully you’ve built up a sizable cash reserve in your working years. The money that’s in your savings accounts can come in handy when it comes to covering your daily expenses in retirement. This cash cushion outside of your retirement accounts can be particularly helpful during a market slump, a time when you want to avoid tapping into your investments for spending money.
If your cash is just sitting in a traditional savings account, you might want to consider opening a high-yield savings account. A high-yield account can be a great place to park your money since it usually offers a higher interest rate than a traditional savings account. Combine that with the power of compound interest, and you can really take advantage of the better rates instead of letting it languish in a deposit account with low rates.
5. Explore a second career. If you can (and want to), keep working by starting a second career. Before you throw something in our direction, hear us out. We’re not talking about going back to your full-time job or signing up for anything stressful. But maybe there’s a dream job that you’ve always wanted to try out but weren’t able to because of your day job and other obligations.
A florist? A professional carpenter? A counselor? Point is you have plenty of options to stretch your creative legs and explore what’s out there. The upside is that you can use that extra income to build up the cash savings we’ve talked about and reduce the amount you need to withdraw from your retirement accounts. It may even help you postpone taking Social Security benefits (which usually means a bigger benefits check down the road).
According to a 2018 Gallup study, the average retirement age in the US is 61. The Centers for Disease Control and Prevention puts the average life expectancy in the US at 78.6 years. This means that you could spend about 17 years in retirement! This is why in addition to starting and building a retirement nest egg, you should also be exploring ways to make your savings last so that you can live comfortably through your retirement.
Hopefully, the tips we’ve shared can help get a conversation going between you and your financial planner. Life is full of ups and downs, and this continues to be true in retirement. So if you’re close to retiring, talk to a professional to lay out a personalized retirement strategy to protect the money you’ve worked so hard to save over the years.
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