One of the greatest financial fears experienced by retirees is outliving their assets. The weight of this concern can be so great that it often impairs the ability of retirees to make the most of their “life after work”. In fact, a recent survey from Transamerica suggests that over half of those surveyed do not feel that they have built a sufficient nest egg for retirement. Additionally, 65 percent stated that they could work until age 65 and still not have enough money saved for retirement. While many experience this fear, few address the concern of running out of money head-on. Unfortunately, many pre-retirees and retirees do not develop a withdrawal game plan that keeps them on a sustainable path for their future.
Know your numbers
So how exactly do you stay on track to pursue your long-term goals and reduce the stress that comes from the uncertainty associated with not being sure you have sufficient resources? The first step in the process is to know your numbers. Have you completed a retirement budget that accounts for all expenses including taxes, health care expenses, travel and rising inflation? Too often, retirees resort to a “back of the envelope” approach to planning their finances, leading them to omit critical factors that can impact the process. In addition to completing and monitoring your retirement budget on a regular basis, also consider accurately projecting non-recurring onetime expenses such as home repairs, vehicle purchases, and other discretionary expenditures. Remember, there is no way to know if you have saved enough for retirement without knowing what you need that money to do for you.
Time your retirement
We all know that you can’t time the markets. However, the one thing you can control is the timing of when you decide to stop working. Have you evaluated different retirement dates to understand the impact they may have on the maximum amount you can spend each year? Too often pre-retirees assume they have to work until a certain point without understanding how much better off they will be by delaying retirement. For example, does postponing retirement two years increase the maximum amount you can spend by an amount that makes it worth working longer? Alternatively, you may find that it is not necessary to extend your career. Having financial clarity can allow you to make better informed decisions on when to retire.
There have been many studies regarding safe withdrawal rates when planning for retirement. While many financial professionals have suggested that a 3-4 percent withdrawal rate in the first year that is adjusted for inflation in each subsequent year (often referred to as the 4 percent rule) is sustainable, the current elevated price to earnings ratio coupled with low interest rates may make the 4 percent difficult to sustain. In fact, some studies suggest that a 3 percent withdrawal rate is more in alignment with today’s environment. It is critical to carefully monitor this each year to make sure that your distributions can be maintained.
Also, be sure to be aware of sequence risk. What is sequence risk? – it’s the risk of experiencing negative returns or losses in the first few years of retirement and it can be devastating to a retirement plan. Be sure to examine your portfolio to make sure it is in alignment with where you are in life. Can you withstand a bear market in the first few years of retirement? Withdrawing too much from retirement portfolio each year is like driving on a flat tire. If you find yourself in this position, be sure to “pull-over” and adjust your retirement distribution plan.
Begin Social Security at the right time
Social security is often an important component of a retiree’s income. In fact, the survey noted that most Baby Boomers (87 percent) are expecting Social Security to be a source of their retirement income and one in three (34 percent) expects it to be their primary source of income. Despite its importance, many are unsure when to begin payments and if they can count on it to be there for their future. The Social Security decision is based upon assumptions regarding how long you plan to work, other taxable income you may receive and of course, how long you expect to live. While that latter is impossible to predict, be sure to consider that the longer you delay Social Security, the higher the benefit grows (maxing out at age 70). Generally, the longer you or your spouse (if married) live, the better it may be to increase your benefit by delaying Social Security. Consider examining all income sources closely before starting payments pre-maturely.
From a market downturn to unexpected health expenses, there are many unforeseen events that can derail your goals and cause you to head toward outliving your money. Do you have an emergency retirement parachute should that happen? How can you slash expenses to get back on-track? Downsizing your home, the sale of investment properties such as a rental or vacation home, and even the sale of your primary residence combined with a move to a cheaper state can all serve as possible solutions if you begin to outlive your assets. If the going gets tough, it’s important to have an emergency plan to replenish retirement funds that may be prematurely exhausted.
While pursuing retirement in the current environment is no easy task, developing a game-plan to avoid outliving your money can help. Since everyone’s situation is unique, consider speaking to your financial advisor to assess your retirement readiness.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.