If you're putting money away regularly for retirement and you have a specific savings goal in mind, you're doing better than a lot of other people. But there's no magic savings target that can guarantee a comfortable future. If you want the best chance of success, you also need to know how to spend your money wisely in retirement. And that's where a lot of people go wrong.
You can't withdraw as much as you want in retirement
A retirement nest egg of $1 million might sound like a lot, but that money probably won't go as far as you'd hoped if your retirement lasts 30 years. Divided up, that leaves you with about $33,333 per year. Coupled with Social Security, it might be enough to cover your basic expenses, but you're not going to be living in the lap of luxury.
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Some people get too optimistic when they see a six- or seven-figure sum locked up in savings with their name on it and they rush to spend it too quickly. About 20% of workers believe they could withdraw 10% to 15% of their retirement savings per year, according to a recent Fidelity survey, but that strategy is a recipe for disaster.
If you had a $1 million nest egg and spent 10% of it every year of your retirement, you might have a very comfortable first few years of retirement, but you're going to run out of money in about a decade. After that, you'll likely have to get a job or rely upon government assistance and the generosity of family members.
How to make your savings last throughout retirement
If you don't want this to happen, you need to choose a safe withdrawal rate for your retirement savings. The old rule of thumb was to withdraw 4% of your savings in your first year of retirement and increase this amount slightly in subsequent years to counter inflation. In its survey, Fidelity notes that its advisors recommend a 4% to 5% annual withdrawal rate.
But some people prefer to be more conservative, withdrawing just 3% of their savings per year. Others choose to develop a custom plan that allows them to withdraw more money in the early years of their retirement while they're still active and budgets less for later years when they plan to stay closer to home.
The right plan for you depends on the size of your nest egg and your plan for retirement. The important thing is to come up with a withdrawal strategy that you believe will help your savings last the rest of your life and stick to it. It's usually best to be a little optimistic when estimating your life expectancy here. It's better to die with a little money left in savings than to run out of money because you lived longer than you expected.
As you near retirement, remember to look over your withdrawal strategy and make sure you still feel comfortable with it. If you're not sure you can survive on your planned withdrawal amount, you might have to rethink your retirement plans or consider delaying retirement to give you additional time to save for your future.
