Smart Money Moves to Make If You’re Worried About Depleting Your Savings in Retirement

Smart Money Moves to Make If You’re Worried About Depleting Your Savings in Retirement

by | Accounting News, News, Newsletter, Retirement, Retirement Savings

Retirement should be a time to finally relax, but concerns about depleting savings can cast a shadow over your golden years. In this article, we’ll delve into smart money moves that can help ensure a more secure and comfortable retirement.

Set Up a Safe Withdrawal Rate

A safe withdrawal rate is the percentage of your retirement savings that you can tap into annually without risking running out of money during your lifetime. A common strategy is the 4% rule, which suggests withdrawing 4% of your retirement savings each year, creating a sustainable income stream while preserving your principal. This approach takes into account market fluctuations and adjusts your withdrawals accordingly. For example, in thriving market conditions, you might withdraw a bit more, while in downturns, you might cut back.

Diversifying your investments is another key factor in managing the safe withdrawal rate. A well-balanced portfolio can help mitigate risks and generate returns, ensuring that your retirement savings remain resilient over time.

Delay Social Security

You are eligible to receive your full Social Security benefit, determined by your individual earnings history, upon reaching full retirement age (FRA), which varies depending on your birth year. However, opting to postpone your application beyond FRA offers the advantage of increasing your monthly benefits by 8% annually, up to the age of 70.

While an increased Social Security benefit doesn’t necessarily ensure your savings won’t deplete, the extra funds each month would contribute to preserving your savings and maximizing your overall retirement income.

Annuities

Annuities are financial products designed to provide a steady income stream during retirement. They can be an excellent option for those worried about outliving their savings. Annuities come in various forms, such as immediate annuities and deferred annuities, each offering distinct advantages.

Immediate annuities involve a lump-sum payment in exchange for guaranteed monthly payments for life. This can be a reliable way to secure a fixed income stream, regardless of market fluctuations. Deferred annuities, on the other hand, allow you to invest a sum of money that grows over time and is converted into periodic payments later in retirement.

Annuities provide a predictable cash flow, but be sure to carefully evaluate the terms and conditions, fees, and potential risks associated with them before making a decision. Also keep in mind that, unlike Social Security, annuities work on a fixed amount and don’t adjust with inflation. Consulting with a financial advisor can help you navigate the complexities and choose an annuity that aligns with your financial goals.

Securing a worry-free retirement requires thoughtful planning and smart financial strategies that are tailored to your unique circumstances. Consult with a financial professional to ensure that your retirement plan aligns with your long-term goals.

How Retirees Can Use the Safe Withdrawal Rate Method to Avoid Running Through Savings Too Soon

How Retirees Can Use the Safe Withdrawal Rate Method to Avoid Running Through Savings Too Soon

by | Accounting News, News, Retirement

Retirees can determine how much money they can withdraw from their accounts each year without depleting their nest egg prematurely by using the safe withdrawal rate (SWR) method. This approach attempts to balance your expected income needs to live comfortably without the risk of running out of money by withdrawing too much too soon. While it is based broadly on your portfolio’s value at the start of retirement, you must also consider the total amount of your savings and other intended retirement income, including the progressing growth of your investment accounts, as well as your expected expenses each year.

How to Calculate a Safe Withdrawal Rate

The safe withdrawal rate helps retirees figure out a minimum amount to withdraw in retirement to cover basic needs, including housing, electricity, food, and transportation. In 1994 financial planner Bill Bengen came up with the 4% annual withdrawal rate, and this has been used ever since as the rule of thumb when determining the safe withdrawal rate. (In 2018 Bengen amended this amount to 4.5% to account for inflation.) According to the 4% rule, retirees withdraw no more than 4% of their starting balance each year. While this approach isn’t foolproof against depletion, it protects portfolios against market downturns by limiting withdrawal amounts. These limitations give retirees a much better chance of their portfolio enduring the length of their retirement.

To get started you would withdraw 4% in the first year of retirement, then increase that amount by the amount of inflation in following years.

If your nest egg is $200,000:

  • Year 1: 4% of $200,000 = $8,000
  • Year 2: providing for a 3% inflation rate, you would withdraw $8,240
  • Year 3: providing for a 2% inflation rate, you would withdraw $8,404

Of course, you can always make adjustments to these numbers based on stock market performance and the value of your portfolio year to year — increasing the withdrawal rate if your nest egg is growing and decreasing the withdrawal rate if your portfolio value is dropping.

A Shortcoming of the SWR Method

A weak point of the SWR method is that it doesn’t account for economic volatility, asset allocation, and investment returns. Essentially, it’s a blanket method that doesn’t always apply to individual circumstances. A trusted investment advisor can help retirees determine the appropriate safe withdrawal rate based on their unique portfolio.

In Favor of the SWR Method

On the flip side, the safe withdrawal rate method is easy to understand, provides a predictable and steady income, and offers a clear path for retirees to better control their expenses.

While the 4% rule has traditionally protected retirees from running out of money, there are alternative methods that might be a better fit for you. A financial advisor can help determine how much you need to save and how much you can comfortably spend each year to avoid depleting your nest egg too soon.