Will Your Savings Last in Retirement?

The number one question we get asked when we start working with someone is, “Are we going to be okay?” The reason they ask this is because they’re worried about running out of money before they run out of time. If you share this worry, it can be stressful to make the transition to living off your savings in retirement. Fortunately, the following steps can help you determine whether you’re on track to save enough to achieve your retirement goals.

#1 – Understand what your retirement needs may be.

This first step is to think about and write down what your ideal life after your earning years looks like. Without an idea of what your retirement goals are, it can be difficult to know if you have enough assets to achieve them. That’s why it’s important to take time to understand and articulate your vision for retirement. Are you hoping to travel the world? Spend time with family and friends? Take up a new hobby? Support charitable causes? Purchase a second home?

Talk with your spouse about your shared and individual retirement goals, and determine how much you might need each month to live comfortably. This figure can help you determine if your current savings is enough to fund your ideal retirement lifestyle.

#2 – Consider what expenses may increase in retirement.

A general rule of thumb is to plan on spending between 70% and 80% of your current income while living in retirement. While it’s true some expenses decrease once you leave the workforce, others actually increase. For example, healthcare is a major expense for most retirees, and healthcare expenses typically increase as you age and encounter more medical issues.

Similarly, you may find that you spend more on hobbies and traveling now that you have more time to do the things you enjoy. That’s why it’s wise to consider both the expenses that will decrease in retirement (e.g., commuting to work) and the expenses that are likely to increase (e.g., healthcare).

#3 – Use a retirement savings calculator.

Now that you have a vision of an ideal life post-retirement and an idea of about how much it’s going to cost, a great way to gain a better understanding of how long your retirement savings may last is to use a retirement savings calculator, like the one on our website.

Our retirement savings calculator can help you determine what you should be saving on a regular basis to reach your personal goals. It takes many factors into consideration, including your current savings, current annual income, expected monthly retirement income sources and more. When viewed together, this information can help you identify any savings gaps and establish an actionable retirement savings plan.

#4 – Develop a financial plan.

Although putting your numbers into a retirement calculator is a good first step, the best way to help ensure your savings will last throughout retirement is by having a financial plan in place to guide your saving, investing and retirement income strategies. A comprehensive financial plan puts you in control of all aspects of your financial life and can help you identify specific actions to address the challenges you face. More than anything, a financial plan can help you articulate and remain accountable to your goals, as it clearly highlights where you stand today versus where you hope to be in the future.

#5 – Establish a long-term investment allocation.

Once you’ve created a strong financial plan, you need to create an investment plan that gives you the best shot of making your plan come to life. A common mistake made by many retirees is maintaining an asset allocation that’s too conservative. While it’s important to protect your retirement fund, it’s also important to continue growing your assets for the future. After all, you could end up living in retirement for 20 to 30 years — or even longer. You’ll need your assets to continue growing in order to keep up with both inflation and your daily living expenses.

In order to continue growing your assets at an appropriate rate, it’s important to maintain a diversified investment portfolio. While stocks are typically more volatile than bonds, they provide the potential for greater growth within your portfolio, which is vital in helping you keep up with inflation. On the flip side, an allocation to bonds and other conservative investments can help protect your assets during periods of market volatility.

The financial markets are unpredictable. In order to take advantage of this fact and extend the longevity of your portfolio, it’s critical to withdraw from stocks when markets are up and from bonds when markets are down. We typically recommend our clients have five to seven years of expenses invested in safer assets, such as bonds. This way, when the markets are down, you have the ability to withdraw from less-volatile investments without realizing a loss in your stock portfolio. Once the markets have recovered, we can sell some stocks at a profit to replenish your bond portfolio in preparation for the next bear market.

This approach allows us to continue growing your assets for the long term while also protecting the money needed to cover your daily living expenses.

#6 – Model a systematic withdrawal plan.

Once you have a solid financial plan and an investment allocation that supports it, the final step is developing a systematic withdrawal plan for your assets. This is simply a scheduled withdrawal from your invested assets based on a reasonable withdrawal rate. Retirees in their mid-sixties typically begin by withdrawing no more than 4% of their retirement savings their first year and adjusting that dollar amount for inflation each year thereafter to maintain their spending power. Of course, the exact withdrawal percentage should depend on how much you have, your lifestyle goals, your life expectancy, your desire for passing on a legacy, etc. Your wealth manager can help you model a systematic withdrawal plan that makes sense given your personal financial situation and retirement goals.