Advice on how to help your money last a lifetime from Roberts Wealth Management
Life is full of things to worry about. A recent survey from Allianz showed that two-thirds of people are more afraid of running out of money in retirement than they are of actually dying. That may seem surprising, but it can be a very real possibility – if you haven’t planned properly.
There are a variety of factors that are contributing to increased concern and increased risk of running out of money. Longer lives, less proactive saving, higher costs, stagnant wages and fewer people with pension plans are some of the key reasons that more of us are at risk of outliving our assets.
A new study from the World Economic Forum found that most people are expected to outlive their retirement savings.
This is because the median amount baby boomers have saved for retirement is just $152,000, according to a report from the Transamerica Center for Retirement Studies. That may sound like a lot of money, but if you withdraw $30,000 per year, those savings will only last five years.
So, what’s the secret to not running out of money in retirement? It can be tough to calculate how much you’ll need, especially when nobody can predict exactly how many years you will spend in retirement. Luckily, there are a few things you can do right now to help ensure you have the best chance of making your money last the rest of your life.
Here are SEVEN suggestions to help prevent outliving your savings and put your mind at ease.
OPTIMIZE Social Security
Your first line of defense against running out of money could be Social Security. Social Security payments are guaranteed to continue for the rest of your life, no matter how long you live, and are adjusted for inflation each year. Plus, they don’t fluctuate with the financial markets. However, it’s a good idea to take steps to help optimize your payments by carefully deciding when to sign up for benefits. “Every year that you delay taking Social Security after full retirement age, you get an 8 percent increase in the benefits that you take,” says Summer Roberts, CEO of Roberts Wealth Management. While you can claim them as early as age 62, doing so will result in a reduction in benefits of up to 30%. The only way to receive the full benefit amount you’re theoretically entitled to is to claim at your full retirement age (FRA). By waiting until after your FRA to claim (up until age 70), you’ll receive a boost in benefits of up to 32% on top of your full amount.
For example, if your benefit at the current full retirement age of 66 is $1,000 but you opt to claim at 62, it would be reduced to $750. If instead you wait until age 70, it would be $1,320. Yet less than 2 percent of men — and only 3 percent of women — wait that long to claim their benefit. “We have found that crafting a Social Security Optimization report for our clients helps them narrow down the options for filing Social Security from the thousands of choices to only a few. This could be a critical decision where most of our clients need our help,” states Roberts.
Ease Into Retirement
Don’t feel pressure to go from 100% to 0%. You may be counting the days until you can quit your present job, but that doesn’t mean you can’t take on some part-time work you enjoy. Keeping busy and productive could help your physical and mental health, while also helping you avoid running out of money in retirement. Every dollar you earn is one less dollar you have to withdraw. Remember, every day you delay withdrawing from a retirement account is one more day your dollars can keep growing.
Assume You’ll Live Longer Than You Think
Many people who are close to retirement today spent their childhood years during a time when life expectancy was significantly lower than it is now. When the Social Security Program was first created, life expectancy was around 65. Today, the average life expectancy is close to 80 and there’s certainly a significant possibility that you will live longer than average. It’s important to not let the memory of what things were like back then distort the realities of today. You need to plan for your assets and cash flow to last much longer than you think. It’s better to save up for too many years of retirement and leave the excess wealth to relatives than to prepare for too few years and end up depending completely on Social Security.
You also can’t forget about inflation. Prices have more than doubled in the last 30 years. Historically, U.S. consumers have seen price increases of about 3 percent a year. Using that figure as your guide, plan on having double the amount of money you have today to maintain the same standard of living in 20 years.
Build Up Your Emergency Fund
You need to assume that there could be some blow-ups around the house, on the car, and in the economy at least to the extent that you have some short-term resources which allow you to accommodate those inconveniences. Your emergency fund shouldn’t be confined to only a checking or savings account. While you should absolutely have money in these accounts for emergencies, your portfolio should also include some segments of assets that can be tapped when the other sectors are suffering from a market hiccup. Failing to plan for an unforeseen emergency can potentially drain your accounts quickly. Planning for these events in advance is an essential step in helping you avoid running out of money in retirement.
Think About How You’ll Cover Healthcare Costs
Healthcare costs are one of the biggest (yet most unpredictable) expenses you’ll face in retirement, making them difficult to plan for. You may spend a little more than your standard premiums, or you could spend thousands of dollars per year on out-of-pocket expenses. Since you can’t predict exactly how much you’ll spend on healthcare, you can, and should, prepare the best you can for these costs.
Regardless of your health history, there are certain costs you will always be responsible for. Once you turn 65, you’ll be eligible for Medicare. With Medicare coverage, you will still be responsible for all premiums, deductibles, and coinsurance, as well as any other out-of-pocket expenses Medicare won’t cover. Original Medicare (or Parts A and B) doesn’t cover most routine care, such as dental and vision care, nor does it cover prescription drugs – you’ll need Part D coverage for that. You can opt for a Medicare Advantage plan that offers greater coverage, though these plans are often more expensive than Original Medicare.
Long-term care is another expense Medicare won’t cover. This cost can be significant, too. According to the U.S. Department of Health and Human Services, the average cost of a semi-private room in a nursing home is around $6,800 per month. Long-term care insurance can help cover some of these costs, but the key is to enroll early — if you wait until you’re in your 60s or later, insurance providers will either charge you sky-high rates or refuse coverage altogether.
Downsize as appropriate
Some people can’t wait to retire early and live a simple life far from the crowd. Choosing a low-cost place to live could help your money last longer. If you can live without a boat, car, big house and a string of expensive vacations, you can stretch out your retirement funds for a long time. Now remember, you don’t have to downsize all at once. You can downsize in stages as your finances, interests and abilities change over time.
Additionally, the home you’re living in probably provides a great deal of emotional comfort. It may be where you raised the kids, where you’ve experienced wonderful memories, and where you’ve built a beautiful life. Whether or not you’re considering downsizing at some point, you should keep in mind that your “home” is also an asset, and the equity in that asset may provide a secondary emergency fund. Now we don’t recommend that everyone should tap into their home to fund retirement, but, as you’ve probably gathered from the tone of this article, we’re big advocates of developing “plan B” options so you can weather all the storms life may throw at you and your home may be one of those contingency plans.
“When you get into retirement, if you really want to make sure that you don’t outlive your assets, you need to control your withdrawal rate,” says Summer Roberts. “Somewhere around a 4 to 5 percent withdrawal rate of your assets is probably the most you can do. If you can make sure your lifestyle stays at or below that number, you are setting yourself up for success. Better yet, set up an income plan that doesn’t rely on withdrawals, but can provide you guaranteed lifetime income.”
Consider an Annuity
With financial insecurity on the rise, many Americans are looking for potential ways to have guaranteed lifetime income. Retirees could use an annuity to supplement Social Security, providing another source of long-term income.
An annuity is a form of insurance that helps to reduce risk and provides lifetime income during retirement and is backed by the financial strength and claims-paying of the issuing insurance carrier. Depending on the type of annuity you buy, the annuity might accrue interest. As they increase in value, most annuities offer tax-deferred growth while shielding the owner’s principal from swings in the market. In general, when you are ready to begin receiving income, your annuity is paid out over time in installments of your choice: annually, monthly, etc. Often, retirees choose to receive monthly payments for the rest of their lives.
Important to note, not all annuities are alike. When considering whether an annuity is right for you, be sure to ask your financial professional about the different types of annuities, including variable and fixed indexed annuities. It’s also a good idea to ask for details about terms and conditions that could apply to the annuity, as well as how and when you can access the money.
The downside of an annuity is that some annuities may have high fees and complicated mechanics. It’s very important not to invest all of your wealth in an annuity because you might need funds available to cope with emergencies. “It can be important to work with an independent financial advisor when looking into various investment vehicles. An advisor who is independent can shop around for which annuity or vehicle suits your and your family’s needs best,” says Roberts.
Making sure your retirement is properly funded is more challenging than ever between risks like market volatility and concerns of economic uncertainty. On top of that, we’re also living longer than we used to. However, retirement worries don’t have to keep you up at night. The right financial advisor can help you make sure you’re on track to have the savings you’ll need to avoid running out of money during retirement.
Planning for retirement is ultimately a challenging guessing game, as there’s no way to predict exactly how much you’ll need to last the rest of your life. For this reason, you should consider receiving objective financial advice from an independent, family-owned & operated comprehensive wealth management firm, like Roberts Wealth Management, to help guide you on the path toward your ideal retirement life. Everyone is capable of avoiding running out of money during retirement; getting there simply takes proper planning.
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