Of the various things today's older workers might fear -- losing their jobs, needing to quit due to health issues, and so forth -- there's perhaps no prospect more terrifying than the notion of outliving their savings. In fact, 60% of baby boomers claim they're more worried about running out of money in retirement than actually dying.
Sadly, it's a valid concern, especially since countless older Americans are also considerably behind on savings. The Economic Policy Institute reports that the median savings balance among workers aged 56 to 61 is a mere $17,000 -- hardly enough to live off even with Social Security factored into the mix.
If you're concerned about outliving your savings, then you'll need to be proactive in avoiding that fate. And there are steps you can take to improve your long-term financial picture. First, however, you'll need to assess your personal risk, which you can do by asking yourself the following questions:
1. Have I been saving 15% or more of my income?
It used to be the case that to retire comfortably, you'd need to set aside 10% of your earnings over time. Not anymore. Given the way healthcare and other costs have inflated in recent years, you'll need to do better if you want enough money to cover the bills for the long haul. That's why workers today really need to set aside 15% or more of their income for the future.
If you've been saving at that level, or somewhere in the vicinity, then you're probably in pretty good shape. Similarly, if you haven't been saving that much, but are still relatively young with many working years ahead of you, there's a good chance you'll come out just fine if you ramp up immediately. But if you're already in your mid- to late 50s and haven't been hitting that threshold, there's a strong chance you'll run out of money at some point if you don't take steps to compensate.
How do you do that? It's simple: Work longer, and max out your savings for as many years as you can. If your original goal was to retire at 65 and you push yourself to work until 70, all the while maxing out your 401(k) during that five-year period, you'll have an extra $122,500 to play with in retirement -- and that assumes zero investment growth. Not only will extending your career offer you an opportunity to save more, but it'll also help you avoid dipping into your existing savings for however many years you remain on the job.
Another option: Continue working in retirement, albeit on a part-time basis. You can approach your long-term employer about a partial retirement, or pursue something new if you can't bear to keep plugging away at your current job any longer. The key is to generate enough income to avoid depleting your nest egg prematurely.
2. How much of my savings do I plan to withdraw each year?
The key to stretching your nest egg is knowing how much of it you can afford to withdraw annually during retirement. For years, experts have lauded the 4% rule as a solid withdrawal strategy, since the rule is designed to make your savings last for up to 30 years -- but unless you fit very specific criteria, withdrawing that much of your savings each year could cause you to deplete your reserves sooner than expected.
The problem with the 4% rule is that it makes certain assumptions about your portfolio and its growth potential. One is that you still have more than half of your assets in stocks, and that your bonds generate a respectable level of income. But what if you unloaded most of your stocks in an effort to lower your risk? Suddenly, that formula is thrown way off. Similarly, bonds today pay considerably less than they did back when the rule was established. So today's retirees need to adjust their withdrawal strategies accordingly.
What should you do? Use the 4% rule as a starting point, but develop a withdrawal plan that better aligns with your circumstances. For example, if you're heavily invested in bonds, and they aren't paying much interest, start out by withdrawing 2% of your nest egg rather than 4%. Being conservative with your withdrawals will help sustain your nest egg, so it's there for you throughout retirement.
3. Am I underestimating my life expectancy?
Many seniors plan for something in the ballpark of a 20-year retirement, but for some folks, that's a dangerously low estimate. That's because one out of every four 65-year-olds today will live past the age of 90, while one in 10 will live past 95. If you're one of them, yet you retire in your mid-60s, you could easily end up in a situation where you run out of money with several years of retirement left ahead of you.
A better bet? Assess your health, and if it's relatively strong, assume the best when it comes to your lifespan. If you operate under the assumption that you'll live until 90 and pass away at 88, you'll have a little something left over to leave to your heirs. And that's a much more ideal scenario than spending down your savings and burdening your family with your bills in your late 80s -- assuming you even have that option, which many seniors don't.
If there's one risk you can't afford to take as a senior, it's outliving your savings and scrambling in your old age. So don't put yourself in that situation. Assess your personal risk early on, and take steps to compensate. Otherwise, you could end up falling victim to the fate that's so many retirees' worst nightmare.