The scary thing about retirement is that it is, to some extent, one drawn-out period of unemployment. Of course, it's possible to find part-time work in retirement, and it's actually a great time to start a business, but not every senior goes that route, and some simply can't -- specifically, those with health issues, limited mobility, or caregiving roles that take up much of their time. As such, it's important to kick off retirement with ample savings to avoid financial troubles later in life.
But what exactly constitutes "ample savings?" It's a tricky question given the financial unknowns associated with retirement, and it's one that's causing today's workers a fair amount of stress.
A good 40% of workers today worry about outliving their savings once they leave the workforce, according to a recent Transamerica survey. If you share that same concern, here are a few steps to take.
1. Figure out what retirement will cost you
We're often told that seniors should aim to replace 70% to 80% of their previous income in order to live comfortably. While that's not a bad general rule to follow, it doesn't necessarily apply to you. Maybe you're planning to downsize to a much less expensive home in retirement, or relocate from one of the priciest areas of the country to a far more affordable suburb. Or, maybe you're planning to live it up in retirement by buying a condo in a major metro area, dining out most nights, and traveling frequently.
Spend some time thinking about the lifestyle you want to maintain in retirement, and run some numbers (based on research) to see what it's apt to cost. That will help you determine what sort of savings balance to aim for.
2. Plan to keep your retirement savings invested in stocks
Some seniors are quick to dump their stocks once they reach a certain age and no longer want to take on the risk associated with them. But while stocks are indeed volatile, and are riskier than bonds, they also lend to greater growth. And if you keep part of your savings invested in stocks, your retirement account is more likely to continue generating wealth during your senior years, thereby minimizing the risk of you depleting it prematurely.
3. Come up with a safe savings withdrawal rate
Once you retire, you'll ideally have a nice lump sum of cash available in your IRA or 401(k). But that doesn't mean you should just have at it. Rather, it's important to come up with a withdrawal strategy that works for you.
You'll often hear that the 4% rule is a solid starting point in this regard. That rule states that if you remove 4% of your IRA or 401(k) balance your first year of retirement and then adjust subsequent withdrawals for inflation, your savings should last 30 years.
But if you're looking at a longer retirement, you'll need to stick to a more conservative withdrawal rate -- say, 2.5% or 3%. And if you're retiring on the later side, you may be able to get away with removing more than 4% a year from savings, especially if you stay reasonably well-invested in stocks. The key, therefore, is to run different scenarios, either alone or with the help of a financial advisor, and see what makes the most sense for you.
Running out of money in retirement is an extremely frightening notion. Take the above steps, and you're much less likely to have it happen to you.