Running out of money is a major fear for retirees — so much so that two-thirds of adults are more scared of outliving their money than dying. It’s one of the most common concerns we hear when a client starts working with us. You may have spent years saving money, but how can you know if it’ll be enough?
How to Calculate Your Needs
Saving $1 million is often thrown out as a rule of thumb for retirement, but that might not be enough for some people. Everyone has a unique lifestyle and specific dreams for retirement. Do you want to travel? Are you planning to take on any new hobbies? Will you snowbird in Florida? All of these can impact your financial needs dramatically.
How your retirement savings are taxed can impact how much money you’ll need as well. For example, $1 million in a taxable 401(k) account will not go as far as $1 million in a Roth IRA. It’s important to consider all of these factors when planning for your specific needs in retirement.
If you’re looking for a general guideline on how much to save, we recommend planning on 70% of your annual gross income. Let’s say you make $100,000 today; you might need $70,000 per year in retirement. Keep in mind, that goal doesn’t have to be reached with savings and investments alone. You’ll probably have Social Security payments and other income sources like rental income or a pension to help meet your needs.
If you want to run the numbers and see how long your savings will last in retirement, we have a complimentary calculator you can use.
How to Avoid Running Out of Money
While planning to spend 70% of your current income is a helpful guideline, it’s just a starting point to get the savings conversation going. The best way to determine if your savings will last throughout retirement is to create a comprehensive financial plan.
Having a written plan helps you prioritize your savings goals and protects you from the potential risk that can deplete your savings:
Inflation Risk: Rising prices not only impact how much money we’re spending today but also how much money we’ll need for the future. Inflation has been especially high in recent years, so make sure your retirement plan takes rising costs into account when planning for your future needs.
Overspending: Poor spending habits or lifestyle choices can quickly deplete your retirement savings. If your retirement plan allows for you to spend $100,000 per year, but you spend $120,000, your nest egg will take a major hit. Keep in mind, your expenses will naturally shift throughout retirement. Early retirees tend to spend more money on travel and hobbies while they are physically active, but those expenses will decrease with time. Towards the end of retirement, your expenses may increase again as your healthcare needs increase. Your retirement plan must account for these changes.
Longevity Risk: People are living longer than ever, which means you may need to cover 20 to 30 years of retirement expenses. The number of people who reach age 100 is expected to quadruple by 2054! Make sure your retirement plan is designed to cover your needs, no matter how long you live.
Healthcare Costs: Unfortunately, living longer often means more risk for illness or long-term care needs. Many people underestimate how much they’ll spend on healthcare, especially towards the end of their life. Many long-term care costs are not covered by traditional insurance, which means you could be on the hook for paying tens of thousands of dollars if you end up needing services like assisted living or in-home care. Insurance and healthcare plans are an important part of any financial plan.
Investment Risk: If you don’t have a strategy for withdrawing money from your retirement accounts, you may unintentionally lock in losses and lose money. If the markets are low, locking in your losses is one of the worst things a retiree can do. It’s important to have a liquidation plan that protects you from having to lock in any losses.
All of these risks may seem overwhelming, but financial advisors like us are trained and educated to walk alongside you as you prepare for retirement. Our retirement roadmaps are designed to protect you from these risks and are created with your unique needs in mind. Our goal is to ensure your savings last as long as you do. If you want to learn how we help our clients prepare for a long, happy retirement, reach out!