After decades of saving for retirement, even forward-thinking individuals start to get nervous when the time comes to actually say goodbye to their jobs. With health care costs continuing to rise and lifespans growing longer, the fear of outliving one’s nest egg looms large.
Earlier this year, a Gallup poll found that 59 percent of those surveyed say they’re worried they won’t have enough money for retirement.
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A generation ago, new retirees were concerned about making sure they could leave a reasonable inheritance to their children. Now, they’re just hoping to have enough money to live out their own days comfortably. “Everyone fears running out of their own money and having to turn to their children for help,” says Rich Arzaga, CEO of Cornerstone Wealth Management in San Ramon, California.
The first thing to do, planners say, is create an estimated budget of what your expenses will be in retirement. You’ll want to factor in housing and food, taxes, and health insurance. Increasingly the equation also factors in debt: A survey last year by Securian found that two-thirds of pre-retirees expect to carry debt into retirement, compared to less than a third in 2009.
Depending on your lifestyle and whether you’ve got a pension and Social Security, your fixed expenses alone might amount to some 50 to 75 percent of your pre-retirement income.Despite some dire predictions, you may be in better shape than you think. A recent study by the Employee Benefit Research Institute found that 85 percent of workers with more than 30 years of eligibility in a 401(k) will be able to replace at least 60 percent of their wages and salary earned at age 64 with their retirement savings and Social Security checks. (The study adjusted for inflation but assumed no future reduction in Social Security.)
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If there’s a gap between your savings and the amount you think you’ll need in retirement, you can either work longer, scale back on your retirement plans, or consider a part-time job to help cover the shortfall.
Even if you have enough saved for retirement, you’ll need a smart strategy to make sure your funds last through a retirement that these days can be 30 years or more. Retirement experts disagree on the best method for drawing down your savings, and it often depends on an individual’s needs and life expectancy.
Here are three helpful strategies from three experts to consider:
1. Use an annuity.
Annuities are complicated products, and they’re not right for everyone. But a low-fee annuity can help create the steady and guaranteed income that can give retirees peace of mind. Annuities come in many varieties, but in their most basic form, consumers pay a lump sum up front in exchange for monthly payments.
Retirement planner Curt Knotick of Butler, Pennsylvania, recommends that his clients purchase an annuity that, combined with Social Security and possibly a pension, will cover just the fixed costs they’ll face in retirement. “That way, they have the confidence of knowing that we don’t have to draw from investments to cover those costs, and regardless of what happens, those costs are covered,” he says.
Most retirees should avoid variable annuities, which are more complicated and carry much higher fees. Instead, Knotick recommends a fixed indexed annuity with an income rider and a total fee structure of one percent or less.
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2. Invest in “buckets.”
In order to help clients have both short-term cash and long-term growth potential for their assets, financial advisor Don Roy of New England Wealth Advisors recommends that people invest their cash in separate accounts that have distinct strategies.
Each account essentially covers a five-year timeframe and is invested to at least provide for basic income needs, with the most near-term buckets being the most liquid and the safest. “We invest in five-year segments, with each one getting a little more aggressive because there is more time to let it grow,” says Roy.
He looks for low-cost short-term annuities or short-duration bonds for the early buckets. To keep costs down in later years, he fills the longer-term buckets with low-cost index funds or ETFs. “We also have a discussion about the impact of taxes, and how to reduce those via different products and strategies,” he says.
3. Start with 4 percent, with a cushion.
Retirement planners have touted the “4 percent rule” for years. Under it, retirees can safely withdraw 4 percent of their total assets in their first year of retirement, and withdraw that amount, adjusted for inflation, thereafter.
The problem with that, as many new retirees learned in 2008, is that if the market crashes early on in your retirement, your assets could suffer irreparable damage.
The fix, according to Jane Bryant Quinn, AARP bulletin financial columnist and author of Making the Most of Your Retirement Now, is having a cash cushion to see you through the next market crunch. She recommends that retirees keep at least two to three years’ worth of expenses in an emergency account, so they can avoid pulling money out of the market when it’s falling.
The best strategy for you, naturally, will depend on your current financial picture, your retirement goals, and your risk profile. If you’re getting close to retirement, sit down with a financial planner or run the numbers yourself. Just having a plan will make it a lot easier to enjoy your retirement without worrying that you’re going to run out of money.
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