Can you think of a downside of living to 100? What about the possibility that you'll end up broke? Financial professionals call it "longevity risk" -- the chance that you'll outlive your money.
Making money in the here and now is important, but when you're planning for your retirement, it's equally critical to consider how much you'll be able to spend each year. After all, the vast majority of people have no idea exactly how long they're going to live.
Life expectancy counts
This sort of situation would make my 5-year-old niece stomp her foot and say, "It's not fair." She'd be right, too. You might have saved up a healthy nest egg, but if you retire at 62 and live to 100, it'll have to support you for 38 years -- perhaps as long as your entire working life. Fail to plan properly and withdraw appropriately, and you might just run out of funds.
Overweight smokers can still live to 100. Trim, perpetually healthy people can succumb to an unexpected illness in their 50s or be run over by a bus at 43. We just don't know yet how our stories will end. Life expectancy calculators from MSN.com or the Wharton School can give you a rough estimate of your own longevity, but you still can't know for sure.
Going through withdrawal
One thing I've learned from our Rule Your Retirement newsletter: In order to make your nest egg last, you should conservatively plan to withdraw about 4% to 5% of it each year in retirement. The higher the percentage, the greater the chance that your funds will run out.
Consider how much money you expect to have saved up by retirement. Let's say it's $1.2 million. If you withdraw 4.5% of that in your first year, it will amount to $54,000. Will that be enough? While you may have at least some Social Security income, or perhaps some other sources of moolah, think about whether $54,000 can fund the lifestyle you hope to have. If not, get cracking on additional savings and investment. (And don't forget about the effects of inflation on your savings!)
Savings aside, smart investing and asset allocation can also help to increase your nest egg. To that end, consider a target-date mutual fund. The holdings of each are designed around a specific retirement date. For example, the T. Rowe Price Retirement 2025 (TRRHX) fund, for those who plan to retire in 2025, recently had 83% of its assets in stocks and 13% in bonds. Its T. Rowe Price Retirement 2045 (TRRKX) counterpart had 88% in stocks and 8% in bonds.
Both of these T. Rowe Price target funds invest in other T. Rowe Price funds, shifting their allocation over time. The 2025 fund, for example, recently had 23% of its assets in the T. Rowe Price Growth Stock (PRGFX) fund and 19% in the T. Rowe Price Value (TRVLX) fund, along with smaller investments in small-cap funds, high-yield funds, international funds, and more. While the growth fund has shareholders invested in the likes of General Electric (NYSE:GE), State Street (NYSE:STT), Amgen (NASDAQ:AMGN), and Schlumberger (NYSE:SLB), the value fund invests in firms such as Coca-Cola (NYSE:KO), International Paper (NYSE:IP), and Time Warner (NYSE:TWX).
The Foolish bottom line
We'd love to introduce you to some more retirement strategies via our Motley Fool Rule Your Retirement service. Try it free for a whole month. You'll have full access to all past issues, chock-full of helpful topics such as as tax-efficient investing, asset allocation, and early retirement strategies. Better yet, there's no obligation to subscribe. You can't predict your lifespan, but Rule Your Retirement can help you find ways to ensure that you have enough money to live all your days to the fullest.
Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola, Time Warner, and General Electric. Coke is an Inside Value recommendation. Time Warner is a Stock Advisor pick. The Motley Fool is Fools writing for Fools.
