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Where wealth is concerned, individuals aren't stuck in little boxes.
You don't start out wealthy, stay wealthy, and end wealthy.
-- Jean Chatzky
Once you amass some wealth for retirement, as most of us need to do, you'll want to safeguard it -- especially as you approach and pass age 50. Retirees need to have a strategy for how their retirement savings will generate the income they need to get by once they're no longer collecting a paycheck. Here are some of the best ideas for that.
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1. Have a withdrawal strategy
You might, for example, employ the venerable 4% rule, or a less problematic variation of it. The rule suggests that you withdraw about 4% of your nest egg annually in retirement, adjusting for inflation over time. If you have a nest egg of $500,000, you'd withdraw $20,000 in your first year of retirement and then adjust subsequent withdrawals for inflation. To be more conservative, you might target 3.5% withdrawals. Or perhaps withdraw more in years when the stock market surges and less in years when it contracts.
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2. Use a Roth IRA or 401(k)
It's smart to take advantage of any tax-advantaged retirement accounts available to you. Most of us can contribute to an IRA -- up to $5,500 annually as of 2017, plus an additional $1,000 for those 50 and older. Contribution limits are much more generous with 401(k)s -- for 2017, they're $18,000, plus $6,000 for those 50 and older. Here's how fast you can build a nest egg by contributing generously to retirement accounts:
|
Growing at 8% for |
$10,000 Invested Annually |
$20,000 Invested Annually |
|---|---|---|
|
5 years |
$63,359 |
$126,719 |
|
10 years |
$156,455 |
$312,910 |
|
15 years |
$293,243 |
$586,486 |
|
20 years |
$424,229 |
$988,458 |
|
25 years |
$789,544 |
$1.6 million |
|
30 years |
$1.2 million |
$2.4 million |
Calculations by author.
The picture can be even prettier if you're socking money away in a Roth IRA and/or Roth 401(k). Remember that traditional IRAs and 401(k)s give you an up-front tax break, reducing your taxable income by the amount of your contribution. That's nice, but come withdrawal time in retirement, that money will be taxable. In many cases, a Roth IRA or 401(k) will be more effective. They offer no up-front tax break, but if you follow the rules, all the funds you withdraw in retirement will be tax-free!
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3. Prepare for hefty healthcare costs
Next, you can safeguard against running out of money in retirement by preparing for substantial healthcare expenses. Per the folks at Fidelity, a 65-year-old couple can expect, on average, to spend a total of $260,000 on healthcare out of pocket. Wit that in mind, as you plan for how much money you'll need in retirement, don't forget healthcare. Read up on Medicare, too, as there are choices you can make with it that can limit your spending on healthcare -- while offering good coverage.
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4. Keep inflation in mind
Inflation is often ignored, but it can really shrink the purchasing power of your future dollars. If the income you live on in retirement is truly fixed and stays so for decades, you may face difficulties in your later years. Over long periods, inflation has averaged about 3% annually, which means that if you have something that costs $100 now, it may cost about $181 in 20 years. Keep that in mind as you plan -- and perhaps ratchet up your savings goal and your annual contributions. (Know, too, that there are a bunch of ways to increase your retirement income.)
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5. Buy an annuity
Another way to safeguard your retirement assets and ensure that they're able to carry you all the way through retirement -- even if you live a long time -- is to invest in an annuity or two (or three). You may even be able to pay more and get your annuity checks adjusted for inflation over time.
In exchange for a big bundle of money, fixed annuities -- as opposed to the more problematic variable or indexed variety -- can start paying you immediately, or on a deferred basis. Below are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the recent economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
|
Person/People |
Cost |
Monthly Income |
Annual Income Equivalent |
|---|---|---|---|
|
65-year-old man |
$100,000 |
$547 |
$6,564 |
|
70-year-old man |
$100,000 |
$633 |
$7,596 |
|
70-year-old woman |
$100,000 |
$585 |
$7,020 |
|
65-year-old couple |
$200,000 |
$937 |
$11,244 |
|
70-year-old couple |
$200,000 |
$1,029 |
$12,348 |
|
75-year-old couple |
$200,000 |
$1,168 |
$14,016 |
Source: immediateannuities.com.
Another great thing about annuity income is the peace of mind it offers. As we get older, many of us will be less interested in managing our investments and even less able to do so.
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6. Don't give up on stocks too early
It's important to pay attention to your asset allocation throughout your investing life. It's true that, as we approach and enter retirement, it's smart to think about shifting some assets from stocks to bonds, or more stable securities. But that doesn't mean retirees can't keep a significant portion of their portfolios in the stock market, where it's likely to grow the fastest over many years.
Remember, if you have 20 years of retirement ahead of you, a big chunk of your money that you won't need for at least 10 years might remain in stocks. And if you're retiring at 62, you may well have 30 or more years of retirement ahead of you.
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7. Maximize your Social Security
You probably realize that Social Security income, which recently offered average monthly retirement benefits of $1,368 (that's about $16,416 per year), isn't likely to support you in great comfort on its own. Thus, it's worth looking into some of the many ways you can maximize Social Security, getting bigger checks. For example, you might want to work an additional year or two and you might want to delay starting to collect benefits -- though for those with average life spans, waiting often won't be worth it.
It's also smart to coordinate Social Security plans with your spouse, if you're married, as you might be strategic about when each of you start collecting. For example, if you and your spouse have very different earnings records, you might start collecting the benefits of the spouse with the lower lifetime earnings record early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get to enjoy some income earlier, and when the higher earner hits 70, you can collect their extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks.
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8. Consult a professional
Finally, you needn't plan for your retirement on your own. Given its importance, it can be worth spending a little money consulting a professional. Ones designated as "fee only" won't be looking to earn commissions from selling you products, and you can seek one near you at www.napfa.org. Yes, you may pay several hundred dollars or more, but a good pro could save you much more than that.
