Strategies and tips for making your money last
According to the Federal Reserve, the average American retires with a median savings of $87,000. 📊 While the top 10% of income earners may start their retirement with upwards of a million dollars, the reality is that most retirees face anxiety over their finances. Given the current average life expectancy in the US — 73.3 years for men and 79.3 years for women — it's more important than ever to plan your finances with a longer view in mind.
With little to no income replacement after retiring, your money must work hard for its place in the world. This demands a strategic approach that keeps your accounts in the green. Here are six ideas to consider as part of your strategy.
1) Practice the 4% rule for retirement
The Bengen Rule was coined in the literature to give retirees a safe money screen that would outlast their retirement. The rule states that if you withdraw 4% of your savings every year, your funds will last for at least at three decades. It's really that simple, though, as it's no surprise that Bengen himself has tried to tweak the rule to adjust to inflation. These days, he advises a withdrawal rate of anywhere between 3% to 5%.
The higher the withdrawal rate, the higher the risk your savings will run out sooner. It's worth doing the math and having knowledge that keeps you within a safe range.
2) Understand your expenses
You can't create a realistic retirement budget without understanding your expenses. Before you retire, take some time to list out your monthly and annual costs so that you know the exact amount that you'll need to cover. This should include housing, utilities, groceries, insurance, healthcare, transportation and discretionary spending.
Thankfully, there are some costs that tend to decrease in retirement, such as commuting, work-related expenses, and maybe even housing (if your mortgage is paid off). But healthcare costs can increase significantly. A good understanding of your expenses will give you a strong foundation for planning your withdrawals.
3) Optimize your investment portfolio
Salary, savings, and pension make up one part of your retirement strategy but having another leg — investments — is critical for growth and sustainability.
While some financial professionals have set rules of thumb, it's essential to find the strategy that gives the greatest reward for the lowest risk. It's important to diversify your investments across different asset classes: bonds, stocks, real estate and cash equivalents, to reduce overall risk.
NerdWallet publishes a regularly updated list of the best high-yield savings accounts, highlighting the benefits of earning above-average yields. And, Forbes has a very good article comparing returns by asset type.
Consider consulting with an independent financial advisor to create an investment strategy that suits your goals.
4) Reduce withdrawals
If the market is experiencing a downturn, your withdrawal rates should slow down in tandem, but you'll also need a de-escalation withdrawal strategy that puts more money in your pocket. Some financial planners suggest withdrawing from taxable accounts before tax-sheltered accounts. This way, you can optimize your tax burden via less income tax for the rest of the year.
If you fall into a high tax bracket, however, some financial planners suggest you withdraw from a low savings account first. It can temporarily jump to a higher bracket, a Roth withdrawal can reduce your liability.
5) Increase your income
On average, retirees receive over $1,600 a month through Social Security. While that creates a strong foundation, it isn't enough. An investment portfolio will force your money to work harder for you.
Retirement is not the time to risk catastrophic losses, so strong diversification is essential. Retirees often lean towards annuities and bond funds for extra income, but you might also decide to put your property to work through tenancies. 🏠
6) Stay flexible, but perform regular reviews
There's no such thing as a perfect financial strategy. The economy will change. The market will evolve, and your expenses will rise with inflation. You should therefore be fluid with your strategy — review your financial plan often and make changes as the need arises. Review your asset allocations and adjust your investments in response.
Retirement demands an entirely new approach to finances, but there's no reason to do it alone. A financial planner can ease your learning curve. If you're riddled with anxiety over your money, you'll miss out on the pleasures of post-retirement life. A robust financial plan will ease your mind and let you find re-enriched joy from your golden years.
For further reading, Forbes writer David Rae has created a list of ways to make your money last longer in retirement, which you can find here.