How long will your savings last in retirement?
If you were planning to take a long trip to the Boundary Waters, or someplace else that was far away from the general store, you would have all sorts of things to plan for. Most importantly, how would you provide food and water for yourself on a set budget with limited space to bring along supplies?
One strategy might be to bring plenty of fresh water along with food that emphasized small size and light weight. You could estimate the amount of each you would need to last you, then if you were within budget, make the purchases. What if everything wouldn’t fit in your canoe, or, your estimates were way off?
Here are 4 easy ways to be smart about using your supplies in retirement:
Getting your retirement savings to last long enough is a very similar problem to solve. You estimate how much money you will need, then work until you think you have enough to last. Assuming all estimates were accurate, and your strategy for using your ‘supplies’ was sound, your money might last as long as you hoped.
But, there are many ways to pack that canoe, and how you do it can have a huge impact on how long you can stay.
What if instead you decided to invest in a water purifier and some fishing gear? You could reduce the amount of supplies carried in, and, have the ability to provide yourself with food and water for a longer stay. Planning ahead and using better financial strategies can potentially add decades to the longevity of your retirement savings.
#1: Do the easy math.
Yes, estimating how much you need to save for retirement can be complicated, but we are fortunate to be living in a world of fantastic technology to help us out. There are online applications that range from super basic, to amazingly detailed. The more detail you can build in, the stronger the likelihood of having accurate estimates.
At a minimum though, you need to do some easy math to get in the ballpark. Approximate the annual income you think you will need in retirement, then divide by .04 (or 4%). Need $100,000 per year for life? Plan on saving roughly $2,500,000 (100,000/.04) to be safe. This calculation is a reasonable baseline, but do yourself a favor and lean towards a
more detailed approach that takes many other factors in to consideration like the ideas below.
#2: Maximize the retirement savings tools available to you.
The next step is to determine the best tools to use to put enough money away to reach the savings goal. I had a discussion recently with a couple that was putting a ton of money away for retirement each month. They were not however making the best use of the tools available. He was not maxing out his 401k, while saving a significant amount of money in a separate after-tax account. After years of this, he realized that if he would have been maxing out his 401k, he would have
lowered his tax bracket along with falling under the income limits to qualify for Roth IRA contributions. So he missed years of Roth eligibility, and paid more income tax than he probably should have. He figures this has
cost them upwards of $200,000 in future savings. If your accountant or financial advisor will not assist you in working through this process, start referring to them as your old accountant or financial advisor.
#3: Have an optimized withdrawal strategy.
The way you take money from your nest egg (social security, 401k, after-tax savings and other retirement accounts) will have a major impact on how long your resources will last. The key is to delay taking social security, while leaning on your other accounts in the most tax efficient way possible. Waiting until age 70 to take social security, and keeping yourself in the lowest tax brackets can
add over ten years to the life of your your savings. If your accountant or financial advisor will not assist you in working through this process, start referring to them as the accountant or financial advisor you used to work with.
#4: Minimize investment fees.
I’m not sure we have mentioned it before, but many people pay more than 50% too much in investment related fees. It cannot be overemphasized how many years of your retirement money is wasted on necessary fees. Use low cost investments wherever possible, especially in your 401k.
Pack and use your resources wisely so you don’t need to ration your supplies or un-retire.
The reality is that even with great information, many people delay, avoid, or completely cast aside the necessary planning to ensure their money lasts them forever. Focus on these 4 things and you will be ahead of the game. Too busy to worry about it? Find some good help.