You've
spent a lifetime saving for and dreaming about a retirement perhaps
filled with travel, volunteering or spending more time with family.
But as you consider your next chapter, you also have to make sure your nest egg lasts for the rest of your life.
By
considering some basic investment rules and creating a detailed plan to
handle everyday expenses and emergencies, you can make your retirement
more comfortable and secure.
Rules of thumb
Some
rules of thumb can help guide retirement thinking, providing a
relatively simple answer to a complicated calculation. One well-known
guideline holds that you should be able to withdraw 4% of your portfolio
every year and still have money to spare when you die.
A recent
research note from T. Rowe Price validated that conventional wisdom --
in part. The investment firm showed that an investment portfolio with
almost any mix of stocks and bonds would survive a 20-year retirement
with an initial withdrawal of 4% per year, increasing the amount by 3% a
year for inflation, and probably would last 20 years even with a 5%
initial withdrawal.
But people are living longer these days, and
that raises the risk of running out of savings. A portfolio consisting
of 60% stocks and 40% bonds stands an 80% chance of lasting 30 years
with an initial withdrawal of 4% and just a 46% likelihood of lasting
that long starting at 5%, T. Rowe Price reported. (The simulation
estimated 8% annual return for stocks and 4.4% to 5.3% for bonds).
Another
approach is to figure out how much you need to spend and see if you can
afford that amount. Guy Baker, a financial advisor based in Irvine,
California, says retirees should expect to spend 80% to 90% of what they
brought home when they worked. Social Security and pension income (if
you have it) would cover part of this. The remainder, multiplied by how
long you expect to be retired, is up to you.
Patricia Jennerjohn, a
financial planner based in Oakland, California, cautions that spending
often doesn't decline, at least at the start of retirement.
"You
shouldn't expect to spend less. You should expect to spend differently,"
she advises. "Certain things, like wardrobe and commuting expenses,
will probably be replaced by things you want to have fun on."
A close look at spending
Jennerjohn
has clients start by figuring out fixed expenses, such housing,
utilities and insurance. These are fixed in that you don't have a choice
whether to pay them, but they will change, going up with inflation or
down with the payoff of a mortgage.
Clients then look at
discretionary spending, including things you'd like to have and do, like
cable TV and travel, and other items, like food, where you have wide
latitude about how much you spend.
"That gives you an idea of the part of spending that you can control to some extent," Jennerjohn says.
A
huge part of figuring out how much you are going to spend in
retirement, of course, is having an idea of how long you will live.
These days, we're living longer than ever.
Jennerjohn usually starts with a lifespan of 90 and cautions against going much below that.
"I don't like people to plan for an early demise," she says.
The Social Security Administration has a
basic life-expectancy calculator. Others, such as
this one from Northwestern Mutual, get into more detail about your health and lifestyle.
Income
The exercise above can lead to a truly frightening number. Now what?
First,
the amount of money you need in retirement is why experts keep talking
about the need to start saving early. Starting early gives you longer to
save and gives your money more time to earn
compound interest, or interest on the interest you've already earned.
People
generally need to save around 10% of their gross income if they start
at 25, 15% starting at 35 and 20% starting at 40, according to Baker.
"The longer they wait, the more they're going to have to put into
retirement from their own income."
Even if you do everything
right, you're unlikely to have all the money you'll need for retirement
the day you stop working. You'll have to keep much of your savings
planted in investments that earn more than the rate of inflation.
Remember
the 4% rule of thumb? Financial planner William Bengen, who calculated
that two decades ago, actually started with a 4.5% withdrawal, and
assumed retirees would keep 53% of their savings in stocks and the rest
in government bonds,
The
T. Rowe Price study concluded that a more aggressive portfolio of 60%
or even 80% stocks actually raises the odds that your money will last as
long as you do. Or put another way, keeping your money in "safe,"
low-yield investments increases the risk that you'll run out of money
before you die.
"You have to get the long-term growth of the
market," Jennerjohn says. She adds that many advisors recommend having
one to three years' worth of expenses in cash or cash equivalents to
help ride out market downturns.
What is retirement, anyway?
Financial
planners talk about the "go-go," "go-slow" and ultimately the "no-go"
phases of retirement, as people travel the world, cut back and then stay
put. The "go-go" years tend to cost more than later phases, although
medical costs often spike in later years.
These days, many people
don't want to collect their gold watch and immediately board a cruise
ship. Instead, they're continuing to work part-time or even going back
to school and launching second careers, such as moving from high-powered
executive to teacher, according to Jennerjohn. "That's going to make it
possible for people to kind of glide into not working, rather than drop
into not working."
No matter how old you are, how much you've
saved or what kind of sunset you have in mind, the biggest retirement
mistake you can make is not planning for it. Now is better than later,
or never.
Culled from US Today
