Will Your Retirement Income Last as Long as You Do?

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While most Americans fear they are not saving enough for their retirement, those who have saved successfully often fear they will outlive their savings in retirement. There is no simple formula that will guarantee your savings will cover your full retirement, but there are steps you can take to help make it more likely.

It seems obvious, but one of the most important things you should do is sit down with your financial advisor as retirement approaches and figure out exactly how much you will need to withdraw from your retirement portfolio each year to live comfortably, but not outlive what’s there. Most advisors recommend a 4% annual withdrawal rate, which should provide about a 90% chance that your funds will last throughout retirement. But there are a number of variables that can play into this equation, and it’s important to work with your financial advisor to build an adequate plan that minimizes risk.

There are a few things you should take into account when you create your plan:

  • People are living much longer today, and medical advances continue at a breakneck pace. Make sure your plan will support at least 25 to 30 years of retirement, maybe more if you have a family history of longevity.
  • Consider life and long-term care insurance to help ensure that an unforeseen illness or death does not drain your retirement fund.
  • Plan for inflation. By the end of your retirement it is possible, some would even say likely, that your money will be worth half as much as it was at the beginning of retirement.
  • Plan for volatile markets. If the last 20 years have taught us anything about the stock market it is that it can gain or lose huge amounts of value in a relatively short time. Have a plan in place to lower your withdrawal rate if the market takes a serious dive or, conversely, a plan to reinvest or rebalance earnings from unexpected market gains.

One way to guarantee income throughout retirement is an immediate annuity. Purchasing an immediate annuity at retirement will provide a stream of income for either the rest of your life or a fixed term, say 20 years. Annuity payouts will vary based on current interest rates and other variables, as well as whether they pay out for a definite term or for the annuity purchaser’s life.

One approach many financial advisers recommend is using a portion of your savings to purchase a lifetime annuity that will cover the “retirement floor,” or necessary expenses such as food, utilities and a mortgage or rent. Once the retirement floor is covered by the annuity, you can be free to spend your remaining funds on discretionary expenses such as vacations or other interests. You can also vary the amount you withdraw from your remaining savings if, for instance, you plan to travel early in your retirement.

If your retirement savings is large enough, an annuity that covers the retirement floor and provides an extra cushion each month is an even better option. First, in the early retirement years when you’re most active, the annuity will provide extra funds to cover the pace of your activities. Then later in retirement, as you settle down, the additional funds can be used to offset inflationary costs that will almost certainly have raised the cost of the retirement floor.

Keep in mind that annuities, while one of the safer ways to invest your money, depend on the ability of the company providing the annuity to pay its claims. So make sure to always research the financial strength of the company where you decide to purchase the annuity. You may also lower your risk by purchasing several annuities from a variety of stable, highly rated companies.

Another often overlooked way to help guarantee a low-risk retirement is to make sure your home is paid off before retirement. Owning your home outright not only significantly lowers the amount that is needed each month during the retirement years, but provides a safety net in the event that your retirement plan takes an unexpected hit. Downsizing a home can provide an instant influx of cash if needed. Another option is a reverse mortgage, which could potentially serve as an additional source of income. Hopefully, you will never need to worry about using your home to fund your retirement, but a paid-off home is a solid insurance policy.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.

Please note that investing involves risk, and past performance is not indicative of future results.

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© 2013 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017