The LIMRA Secure Retirement Institute estimates that the average healthy person will live through their mid-90s. If you retire at the traditional age during your 60s, this could mean needing enough retirement income for 30 years or more. That is no small trick once you’ve stopped earning a paycheck. As if saving that much money isn’t enough, the following are other threats retirees face in planning for retirement income.
Market volatility: Reposition assets to reduce risk
A younger investor can swing for the fences – putting a large portion of their assets in equity investments. However, the closer you get to retirement, the more funds you should transition to conservative vehicles. The last thing you want to do is suffer investment losses right before you retire. As you approach retirement, it’s important to diversify your portfolio to include more conservative holdings.
Too conservative: Keep a growth component
With that said, you don’t want to go overboard on conservative investments either. Since retirements are lasting longer these days, it’s important to maintain at least some exposure to equities for growth opportunity. Not only can this help your portfolio keep pace with long-term inflation, but also remember that a 30-year timespan offers the potential to deliver some impressive gains. It all comes down to what you’ve accumulated by the time you retire and how much you’ll need both for day-to-day living expenses and for the long haul. The healthier you are – and if you have longevity genes in your family – the more money you will want to allocate to growth options.
Run out of money: Watch how much you withdraw
Another point to consider is your withdrawal rate in retirement. If you underestimate your expenses or don’t stay on top of your portfolio’s performance, you could run out of money. An important part of retirement planning is to monitor and adjust your assets with a prudent distribution plan so you continue to receive income throughout your retirement.
Pension supplement: Guaranteed sources of income
Most retirees qualify for Social Security benefits, which are guaranteed to continue until you pass away. One way to increase that benefit is to wait until full retirement age to start drawing them. You can accrue a higher amount if you wait even longer; the Delayed Retirement Credit accrues an additional 8 percent a year up to age 70.
A retiree who does not receive an employer pension also might want to consider using some of his assets to purchase an income annuity. An annuity is a contract purchased with a lump sum that guarantees to pay out a specific or minimum level of income for a certain period of time; you can even choose a guaranteed lifetime option in exchange for a reduced payout. Bear in mind, though, that an annuity typically is an irrevocable purchase, and can be quite complicated in the various options its offers (i.e., inflation hedge, long-term care rider, death benefits) and fees charged. It’s a good idea to work with a financial advisor or experienced insurance agent to help you decide if an income annuity, and which one in particular, is right for your situation.
Living longer: Work longer
Many folks are willing to keep working past the traditional age in anticipation of needing more retirement income. This allows you to save more and give your investments more time to grow. However, bear in mind that tax-deferred accounts such as 401(k) plans and traditional IRAs mandate Required Minimum Distributions (RMD) starting at age 70½. If you work past 70, you may have to take money from these accounts even if you don’t need it. Note, too, that RMDs are taxed as regular income (in most cases) and must be withdrawn before Dec. 31 of each year.
Living large: Rightsize
If you’re worried about running out of retirement income, there are other options to consider. For example, selling your home and downsizing to something smaller. This might be a good move if you want to travel early on during retirement, as a condominium is a lot easier to maintain if you’re gone for long periods of time. Also, take a look at any big-ticket expenses you might not be able to sustain during retirement, such as trading in an expensive country club membership for tee times at a public golf course. The point is to right-size your lifestyle to match your retirement income, not the other way around.