This article was updated on Dec. 30, 2015.
What are the easiest ways to make sure you never run out of money? Social Security may not be enough when you retire, so it's vital to take your financial future into your own hands. We asked three of our experts to explain what you can do to make sure your money lasts as long as you need it to.
One thing we can do to help better secure our financial future is increase our savings rate each and every year.
In a previous article, I used the example of a 28-year-old named Sam, who saves just 5% of his $35,000 salary -- only $1,750 per year -- and invests in an index fund that mirrors the return of the S&P 500, which has delivered a historical return of 9.6%. If the index manages the same average return, and Sam's salary rises by 3% per year, then he'll have $703,698 when he retires 35 years later.
But let's get a little ambitious and say Sam ups his savings rate by just 0.1% each year. So when he's 29, he'll save 5.1% of his $36,050 salary, and by the time he retires at 62 he's saving 8.5% of his income. (In 2014, Moody's found that among those aged 55 and older, the average savings rate is 13%, so that's by no means an unrealistic guess.)
How much would Sam have when he's 63? A whopping $862,695, or 22.5% more than the original scenario.
In investing -- and in many areas of life -- a little bit goes a long way. A marginal boost in the amount we save each and every year can have a major impact on our total retirement savings.
The best way to make your money last your lifetime is, obviously, to have plenty of money. That's easier said than done, though. Many of us are simply not where we should be in terms of our retirement savings. We might have gotten a late start, or perhaps we just haven't been able to save much. But all is not lost.
One good way to turbocharge your nest egg, if you can pull it off, is to work a few more years and retire a little later. Let's assume that you've amassed a retirement account of $100,000 by age 40 and that your money is growing at about 10% annually, the stock market's long-term average. See how it grows:
|By age...||Nest egg grew for...||And became...|
|65||25 years||$1.1 million|
|67||27 years||$1.3 million|
|68||28 years||$1.4 million|
|69||29 years||$1.6 million|
|70||30 years||$1.7 million|
|72||32 years||$2.1 million|
Clearly, whatever your desired retirement age is, you can build a lot of wealth simply by putting it off for a year or two. There are other benefits to delaying your retirement, too. Not only is your nest egg growing larger, but you're also putting off the day when you need to start drawing it down. You'll probably enjoy a few more years of employer-sponsored health insurance, too, saving some spending there. And finally, if you also delay starting your Social Security benefits, you can increase them by 8% per year from your normal retirement age to age 70.
Still, it's possible that you'll suddenly find yourself out of a job, and you might not earn the market's average 10%, either. To combat these risks, you can save more aggressively. Remember: The table above doesn't include additional investments, which you should make whenever possible.
One of the best ways to help make your money last a lifetime is to push your comfort zone and take on a bit more investing risk. I'm not saying everyone should go put every single penny of their life savings into a high-risk stock, but far too many people take no risk at all with their money, therefore missing out on some huge potential gains.
For instance, right now, the best-paying federally insured savings accounts pay about 1% interest on your money. If you have $100,000 in that account at age 40, and you keep it there for 25 years, you'll have about $128,000 when you retire at age 65. By contrast, if you invest half of that money in stocks earning 10% annually and keep the rest completely safe, then you'll have more than $605,000 when you retire -- nearly five times as much.
Sure, if you go further and put everything in stocks, then as Selena points out, you'll be a millionaire in retirement. But even those who aren't comfortable with an all-or-nothing approach shouldn't hesitate to put some of their money into higher-returning investments, because the payoff is simply too good to pass up.