If you just retired, congratulations. You’ve received the gold watch, relished the looks of co-workers who envy your new freedom, and begun to plan that long-awaited European tour you had always hoped to take. Life is good, but you do have concerns – mainly, whether your future income can sufficiently cover your basic living expenses, plus those little extras that make retirement special.
Financial experts generally calculate that you need between 70% and 85% of your pre-retirement income to maintain your lifestyle. Even if you were diligent about saving during your working years, it’s likely that your investment portfolio has not yet fully recovered from the recession, and returns are still lower than you expected them to be. How do you ensure that your nest egg is big enough to meet ongoing expenses?
Significant Future Income Increases Are Unlikely
Your future income will be a combination of Social Security benefits and the systematic liquidation and withdrawal of your retirement assets over the remaining years of your life. At age 65, you can expect to live, on average, another 19.1 years, according to the Centers for Disease Control and Prevention (CDC). If you are genetically gifted, however, you may live to 100 or longer – the number of centenarians in the U.S. rose to 53,345 in 2010, a 65.8% increase from 1980.
Your initial retirement calculations were probably based upon an annual withdrawal rate of 4% of asset value, a figure most financial planners had generally agreed would provide a stable income for 30 years. Nowadays, however, that percentage is considered by some to be too liberal. Recent studies have suggested that in the current economic environment, withdrawing income at a 4% rate could increase the risk of depleting your assets during your lifetime. Since the level of your future income is uncertain and may be lower than originally anticipated, it would be prudent to reduce your living expenses where possible so that less income is needed to provide the same quality retirement for your remaining years, however long that may be.
According to a 2013 Gallup Poll, more than half of working Americans expect to retire by age 65 or earlier. However, this expectation stands in stark contrast to their practical readiness for retirement.
The 2013 Retirement Confidence Survey, performed by the Employee Benefit Research Institute and Matthew Greenwald & Associates, delivers the following unsettling statistics:
In 2013, three of four Americans had total savings of less than $25,000, and an astounding 28% had less than $1,000.
Less than half of Americans have any idea how much money they will need during retirement or how much they have to save in order to reach that amount.
Almost two-thirds of all workers feel they need more than $250,000 in savings, 40% estimating they need at least $500,000.
Six of ten workers contribute to a retirement savings plan through work, but the average is skewed heavily in favor of those who earn $75,000 or more annually – 94% of those who earn $75,000 or more versus 24% of those with incomes lower than $35,000.
Only one in four of workers feel very confident that they will have enough money to take care of basic expenses, not including healthcare, during retirement – and only 14% think they will have enough money for healthcare.
Despite the probability that many Americans will have to rely on Social Security and Medicare for the bulk of their retirement and healthcare expenses, a FindLaw.com survey reveals that 30% of workers lack faith that these programs will be viable when they retire. Many economists analyzing the existing demographic and savings data project that tomorrow’s retirees need to save more, work longer, and get by with less than today’s retirees do. If that potential fate discourages you, implement the following tips as soon as possible to improve your likelihood of enjoying a comfortable retirement.
This article first appeared in Forbes.com on November 28, 2013.
More than seven out of 10 Americans worry about outliving their income during retirement, according to a recent survey by Prudential PUK +1.57% Retirement. Decades of pension plan conversions to profit-sharing plans, combined with a stock market decline of more than 50% in 2008 and falling real estate values have devastated savings and retirement accounts nationwide. As a result, a combination of post-retirement work, Social Security benefits, and prudent portfolio management is going to be necessary for most baby boomers to retire during the next two decades. Implementing the following steps can help you maximize your post-retirement income so that you remain financially independent during your golden years.
1. Continue to Work
According to a recent Gallup Poll, almost three-quarters of U.S. workers intend to work past retirement age, 40% by choice and 35% due to necessity. Delaying retirement as long as possible makes economic and psychological sense due to the following reasons:
Increased Financial Security During Retirement. The last years of work are typically the highest income-earning years of employment. At the same time, most of life’s major expenses – buying a house, educating children, acquiring significant assets – are over, so that a greater proportion of income can be devoted to savings.
Improved Mental and Physical Health. According to Carol Dufouil, at a recent presentation at the Alzheimer’s Association International Conference, the risk of getting dementia drops by 3.2% for every year worked past retirement age. Study after study indicates that people who continue to work live longer and are in better health than those who retire at age 65 or earlier, and the benefits are present for those who worked full-time or part-time.
Unless your job is too physically demanding or stressful, seek to extend your employment, either full-time or part-time, as long as possible.
For most people, the ability to retire early is a result of choices made in their early working years plus the choices about the desired lifestyle they hope to enjoy after ceasing employment. The combination of the cost of the lifestyle you desire and the years remaining after you stop working drives the amount of investment capital you need in order to maintain the lifestyle you want.
The age at which you can enjoy freedom from full-time employment with some degree of security is dependent upon the following life choices: