One way to be sure you don’t run out of money in retirement is to carefully plan in advance. I like to talk about the Retirement Red Zone, the five years before you retire and the 10 years after. This window is when a lot of important choices and adjustments can be made to increase the success of your retirement plans. Whether you’re a few months or a few decades out, here are seven ideas on how to be sure you don’t run out of money in retirement.
1.Work longer. One of the great risks for folks in their 50s and 60s today is that they will live longer than they think. The Social Security Administration has a great calculator so help you estimate how long you have left. Here’s a hint: a 56-year-old male today can expect to live more than 26 more years.
Working longer can be a great help to create a stress-free retirement. If you still like your job, you can work a few more years to boost your retirement savings and delay the day you start drawing money out of retirement accounts. The math here is surprising. If you have been saving $20,000 a year while you work and if you plan to spend $50,000 a year in retirement, each year you delay retirement effectively adds $70,000 to your nest egg.
If you hate your job or can’t physically continue to do the work you have done, you can leave that career and switch to another job that is less physically demanding or one that is more fun. Maybe it’s work related to a hobby or something else you enjoy. Even if you go from making $100,000 a year to making $10,000 or 12,000 a year, that income can really make a difference.
2. Save more of what you make. Financial planning experts say that you should save about 10 percent to 15 percent of your gross pay starting in your 20s. The older you are, the more you should save. It’s hard. But start by saving more than you think is comfortable and see how it goes. Then increase it a couple percent every year. You will be surprised how much you can put away.
3. Increase your savings rate. Make it a habit to look at your retirement plan at work and opt in to the automatic increase option that’s common in many plans. This allows you to commit today to increasing your savings rate every year by a small amount. This helps you save more over time. And it’s pretty painless.
4. Invest more of what you save. Often people are worried about the risk that the markets might crash and so they save into cash or CDs. These “safe” investments have a hard time keeping pace with the rising cost of living.
If you have five years or more before you need to spend the money, you will get better results if you own stock in good companies. Historically the S&P 500 index (the 500 largest U.S. companies) has averaged about 10 percent per year since its inception in 1928. Statistically it’s up three years out of four. So, if you own a low-cost S&P 500 ETF and let it compound for 10 years, it will likely grow better than 8 percent a year on average. This is about 5 percent better than the historical average inflation rate. The ETF will bounce around, but it will average out.
Remember, retirement money is often money you plan to spend in 20, 30 or more years. Even if you are 60, you still have about 20 years before you will spend a good bit of your money. You have time to ride out some bumps in exchange for long-term compounded growth.
5. Control your expenses now and later. It really does matter how much you spend. In fact, for retired families, the monthly cost of living is a huge factor in how long their retirement saving lasts.
Make an audit of all the money you spend over 60 days. I bet you will be surprised. Usually there are at least one or two recurring monthly expenses you signed up for and now don’t use. The key here is not to do without all the fun stuff in life. The key is to be intentional. You should spend your hard-earned money on things you truly value, not on dopey things you don’t even use.
Also think about how and where you want to retire. If you choose a low-cost location and live a low-cost life, you can really stretch your retirement dollars.
6. Make a long-term healthcare plan. The fact is that most Americans will need some outside help with healthcare matters before they die. And when people need that help, they will want to stay at home and use services that fit them. If you have money saved for this purpose or if you have a quality long-term healthcare insurance product, you will have better options when that time comes. Plan now and give yourself some time.
7. Max-out your Social Security benefits. Social Security income benefits are a fabulous benefit for every working American. It amounts to a lifetime income supplement with a cost of living adjustment. It’s very expensive to purchase a benefit like this. Do yourself a favor and make the most out of this benefit. Consult with a Social Security planning expert, like me, to work out exactly how to maximize the benefits for your situation. In general, most people get full benefits at age 67. But if you wait to age 70, you get about 8 percent per year more benefits. So that’s a bit more than 24 percent increase, for life, just by waiting a few months to start. If you expect to live to see age 82, you will be money-ahead by waiting to start at 70.
How do I find a financial advisor?
Part of building that plan and executing it successfully is choosing a great partner to help you.
If you think you might retire in the next 10 years, it’s a great time to visit with a CERTIFIED FINANCIAL PLANNER™ professional. Start your search here. The link will let you see CFP® professionals near you.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.
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