MRSL

Making Retirement Savings Last


Different ways to respond to the challenge.

As you retire, there are variables beyond your control. Investment performance and factors like inflation in our unpredictable economy are toward the top of the list, but the rising cost of healthcare can have a significant impact on savings too. Your approach to withdrawing and preserving your retirement savings can give you more control over your financial life during the golden years. Since many retirees today have only a small amount of savings to work with, creating a strategy and sticking to it can stretch those dollars as far as they can go. 5,6

A GOBanking Rates survey from 2017 showed that only 29 percent of all respondents had $100,000 in retirement savings. More than half of baby boomers had less than that amount saved and almost a third of baby boomers had nothing at all. 6

A savings account is vital during retirement. Those who haven’t started saving can immediately change their prospects by consistently putting some money aside each month. Those who have accumulated some savings and investments can consider using the strategies below to extend their retirement savings.

Ease into retirement.

Rather than quitting your job immediately at age 65, continuing to work even part time while you’re still healthy and capable allows you to test the retirement waters first before jumping in with both feet. Working part time allows you to continue to earn, which can delay or offset the amount you need to use from your retirement fund. 6

Working part-time generates social as well as financial benefits. Transitioning more slowly from full-time work to retirement gives retirees an opportunity to carefully consider their options and take up new interests while still maintaining social relationships from work. 6

Easing into retirement means you can put off claiming Social Security benefits which increases your benefits amount when you do claim them later on. By waiting to claim benefits until age 70, retirees “earn” an additional 8 percent annually on their Social Security pay-outs. There are no increases in Social Security benefits for delaying past the age of 70. 6

Reduce expenses.

If you haven’t saved much by the time you retire, a big part of your strategy will be to downsize and save after retirement. One important way to do this is to relocate to a smaller house. A smaller house can allow you to unlock some of the equity in your current property while also saving on utility costs. 6,8

Relocation can also result in huge savings. For example, the annual cost of living in Birmingham, Alabama is $33,219 while the annual cost of living in Spokane, Washington is $43,102. Some retirees even opt to live in a different country where the cost of living is significantly lower. These strategies can improve the chances that you’ll be able to make your retirement fund and Social Security benefits go the proper distance. 6,8 6,8

Budget.

Drawing retirement income without draining savings is a challenge, and the response to it varies per individual.

Should you go by the 4% rule? For decades, retirees were cautioned to withdraw no more than 3-5% (an average of 4%) of their retirement balances annually (adjusted north for inflation as the years went by). This “rule” still has merit, although sometimes the percentage must be increased out of necessity. T. Rowe Price has estimated that someone retiring with a typical 60%/40% stock/bond ratio in their portfolio has just a 13% chance of depleting retirement assets across 30 years if he or she abides by the 4% rule. A 7% initial withdrawal rate invites an 81% chance of outliving your retirement assets within 30 years.1,7

That sounds like a pretty good argument for the 4% rule, but while the 4% rule regulates your withdrawals, it doesn’t regulate portfolio performance or the rate of inflation. If the markets don’t do well, your portfolio may earn less than 4%, and if your investments repeatedly can’t make back the equivalent of what you withdraw, you’ll risk depleting your nest egg over time. 7

Or perhaps the portfolio percentage method? Some retirees elect to withdraw X% of their portfolio in a year, adjusting the percentage based on how well or poorly their investments perform. As this can produce greatly varying annual income even with responsive adjustments, some retirees take a second step and set upper and lower limits on the dollar amount they withdraw annually. This approach is more flexible than the 4% rule, and in theory you will never outlive your money.7

Or maybe the spending floor approach? This is another approach that has its fans. You estimate the amount of money you’ll need to spend in a year and then arrange your portfolio to generate it. This implies a laddered income strategy, with the portfolio heavily weighted towards bonds and away from stocks. This is a more conservative approach than the two methods above: with a low equity allocation in your portfolio, only a minority of those assets are exposed to stock market volatility, and yet they can still capture some upside with a foot in the market. 7

Attention has to be paid to tax efficiency. Many people have amassed sizable retirement savings, yet give little thought as to the order of their withdrawals. Generally speaking, there is wisdom in taking money out of taxable accounts first, then tax-deferred accounts and lastly tax-exempt accounts. This withdrawal order gives the assets in the tax-deferred and tax-exempt accounts some additional time to grow. A smartly conceived withdrawal sequence may help your retirement savings to last several years longer than they would in its absence. 2

But if you have little to no savings and you’re approaching retirement, these withdrawal approaches may be irrelevant to you. If this is your situation, it would be wise to start saving right away and consider purchasing an annuity with certain options that pay out a guaranteed income for the rest of your life. Stashing even a small amount into an annuity can provide extra income above and beyond Social Security benefits for extra expenses in retirement. 7,9

Take care of yourself.

Keeping healthy can benefit you in two ways. Increasingly, people want to work until age 70, or longer. Many assume they can, but a 2012 Retirement Confidence Survey from the Employee Benefit Research Institute found that 50% of current retirees had left the workforce earlier than they planned, with personal or spousal health concerns a major factor. 3,4

Eating right, consistent exercise and regular doctor visits can bolster earning potential as well as your constitution. Health problems can hurt your income stream and reduce your chances to get a job, and medical treatments can eat up time that you could use in other ways. Good health can mean fewer ER visits, fewer treatments and fewer hospital stays, all saving you money that might otherwise come out of your retirement fund.

Fidelity figures that a couple retiring now at age 65 will spend $240,000 (in 2012 dollars) on retirement health expenses across their remaining years. That $240,000 doesn’t even include dental, over-the-counter drug and long term care costs (and as a reminder, many eye, ear, and dental care costs are not even covered under Medicare or by Medigap policies). Every year you work may mean another year of health insurance coverage as well as income.4

1 - individual.troweprice.com/staticFiles/Retail/Shared/PDFs/retPlanGuide.pdf

2 - online.wsj.com/article/SB10001424052748703529004576160693310435366.html

3 - www.dailyfinance.com/2012/09/03/postponing-retirement-70-not-the-new-65/

4 - www.marketwatch.com/story/good-health-means-more-retirement-money-2012-12-06

5 - https://www.forbes.com/sites/joeljohnson/2018/12/07/4-things-to-think-about-regarding-healthcare-as-you-approach-retirement/#3959aa2f618b

6 - https://www.seattletimes.com/business/5-ways-to-make-your-retirement-savings-last-longer/

7 - https://investor.vanguard.com/retirement/income/making-savings-last

8 - https://www.kiplinger.com/article/retirement/T065-C032-S014-is-downsizing-in-retirement-right-for-you.html

9 - https://money.cnn.com/2016/05/25/retirement/retirement-annuity/index.html