Americans are living longer than ever before: A man who reaches the age of 65 can, on average, expect to live until 84, according to the Social Security Administration. The average woman who hits 65 will live until 86. In the past most Americans lived for only a few more years after leaving the workforce.
While it’s good news that many of us are enjoying greater longevity, it also creates certain challenges. Chief among them is the need to finance a protracted retirement, especially when fewer of us than ever before will have pension checks to count on each month when we retire. Naturally, the risk of outliving our assets is growing.
How to counteract that threat? Here are a few ways to ensure your money lasts as long as you do.
Adjust the 4 Percent Rule
Since the 1990s one of the more popular axioms concerning retirement planning is that you can safely withdraw 4 percent of your assets in the first year of retirement and adjust that amount for inflation in subsequent years. By sticking to this withdrawal rate, experts have suggested, you have little chance of running out of money during your lifetime.
The problem with the 4 percent rule is that it came into fashion when the bond market was paying much higher returns. Today the 10-year Treasury note offers up an annual yield of less than 3 percent. Consequently, researchers like Wade Pfau of the American College of Financial Services say we need to become more conservative in our allowances. For most people Pfau advocates a 3 percent initial withdrawal in year one to make up for today’s low interest rates.
Budget, Budget, Budget
You’ve probably heard that retirees only need 80-90 percent of the income they lived on during their working years. It’s certainly true that you can scale back on some expenses, such as the gas money or train fare you’d shell out for your daily commute.
However, you can’t assume your other expenses will stay the same in retirement. The fact is that you have a lot more free time to spend on hobbies, such as traveling and golf, that can put a big dent in your wallet. By maintaining a detailed budget of your monthly spending, you’ll help keep your expenditures at a sustainable level.
Find the Right Asset
One of the biggest mistakes you can make as you get older is being too aggressive with your investments. A stock-heavy portfolio has obvious perils; should the market tank, you don’t have as much time as younger investors to ride it out and recoup.
But it’s an equally big mistake to become overly cautious. For most of us bonds and money market funds alone aren’t going to provide the returns we’ll need over a decades-long retirement. That’s especially true in today’s low-interest-rate environment.
What you need is a more balanced approach. When you enter retirement, consider keeping 40-60 percent of your assets in stocks or stock funds, then gradually shift toward fixed-income securities each year thereafter.
Consider an Annuity
How prepared would you be financially if you made it to age 90, or even 100? That might seem like a long shot, but consider the fact that there are nearly two million Americans in their 90s today.
For even the most disciplined among us, it’s tough to make our money last that long. One of the best ways to eliminate longevity risk is to buy a fixed annuity that will pay a set amount for the remainder of your life. The number of annuity products on the market is mind-boggling, so you may want to talk with a trusted financial advisor who can steer you through the thicket.
Variable annuities are a whole different animal. Their returns are tied to the performance of underlying securities, and they’re notorious for their hefty fees and complex contracts. For a lot of folks it’s better to steer clear.
For many Americans retirement means a once-and-for-all split from the demands of a job, but for some that parting is a more gradual process. Indeed, more adults of an advanced age are working part-time these days in order to meet their retirement needs. According to the Bureau of Labor Statistics, the portion of adults ages 65 to 74 who participate in the labor market is growing and will reach 32 percent by the year 2022.
Working part-time might not be such a bad thing. Not only does a job give you a little more wiggle room with your money; it also allows you to forge social connections and potentially build a set of skills you never used in your primary career.