This week, we’ll return and conclude our discussion on estimating how much you need to save for retirement, and discuss strategies to make your retirement money last.
Over the past few weeks, we’ve discussed asset allocation, how much you’re putting aside for retirement, and how much and how long you’ll need retirement income. Once you have all of that information, you can plug it into a retirement calculator and see if you’re meeting your retirement goals! Below, you’ll see a non-exhaustive list of retirement calculators.
What happens if you’re not reaching those retirement goals? There are a few avenues to explore. Can you increase how much you’re saving each year? Are you willing to invest in something with a higher average rate of return, but with more risk? While you likely don’t want to consider working longer than you plan to, or adjusting your goal retirement lifestyle, these considerations may need to be made as well.
Alternatively, you can also look at some strategies to make your retirement funds last. While living off of your income – social security income, pension income, and any income from dividends and bond coupons – without touching your principal retirement savings would be great, it’s not realistic for most households. Instead, you could consider the 4% rule. The 4% rule involves withdrawing 4% of your retirement funds in your first year of retirement. For instance, if you had $750,000 in a retirement account, you would withdraw $30,000 in year one, and add that to any other sources of retirement funds you have. To account for inflation, you would need to increase that amount each year by 3% or so, withdrawing $30,900 in year 2, $31,827 in years 3, and so on and so forth. As long as your retirement funds are growing at least 3%, that would provide you a minimum of 25 years of retirement income. Additionally, if you want to protect against a down market, you can withdraw for the following year as well, and keep next year’s funds in a certificate of deposit (CD) or somewhere else safe that accrues interest. For instance, in the previous example, you could withdraw $60,900 in year 1, and place year 2’s $30,900 in a CD, so you won’t have to withdraw from your retirement funds next year if it’s a down market.
Whichever direction you choose to go with your retirement planning, the important point is that you need to begin planning as soon as you can, so you can make the necessary adjustments to your future retirement savings, to allow you to live the lifestyle you dreamed of during retirement!
That concludes our retirement series, if you have any questions or concerns, feel free to email me at gjsturm@vt.edu!
http://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx
https://investor.vanguard.com/calculator-tools/retirement-income-calculator/
http://money.cnn.com/calculator/retirement/retirement-need/
http://www.schwab.com/public/schwab/investing/retirement_and_planning
https://www.aarp.org/work/retirement-planning/retirement_calculator.html
https://tools.finra.org/retirement_calculator/
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