You'll often hear that it's important to save for retirement so you're not overly reliant on Social Security once your career comes to an end. Seeing as how those benefits might only replace about 40% of your pre-retirement income to begin with, and how benefit cuts are a distinct possibility in a little more than a decade, building a nest egg is absolutely crucial if you want to avoid financial struggles later in life.
But just because you manage to amass some savings doesn't mean that your money is guaranteed to last throughout your retirement. In fact, recent data from Northwestern Mutual reveals that 43% of Americans cite outliving savings as a major retirement concern. And it's certainly a valid one. But there's a key step you can take to avoid running out of money in your lifetime.
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It's all about managing your savings from the start
You might assume that the more money you're able to save for retirement, the less likely you'll be to deplete your nest egg at some point in time. But actually, having more money doesn't necessarily guarantee that your savings won't dwindle down. It's possible to spend down a $1 million nest egg faster than a $300,000 one if you aren't careful.
If you want to significantly lower your chances of depleting your retirement savings, come up with a smart withdrawal strategy before your career wraps up. If you limit your withdrawals to a preset percentage that makes sense for you, there's a good chance your money will last as long as you need it to.
Of course, that begs the question -- what's the right annual withdrawal percentage? For years, financial experts seemed convinced that a 4% annual withdrawal rate was the right way to go. But these days, that seems like too aggressive a withdrawal rate given that retirees tend to be pretty heavily invested in bonds, and bonds aren't paying today what they did years ago.
As such, you're probably better off opting for a more conservative withdrawal rate, assuming you expect to have an average-length retirement. That could mean tapping your savings to the tune of 2.5% to 3% a year.
Another good way to help ensure that you don't deplete your savings? Plan to work in some capacity during retirement -- or at least during the early stages of it, when you're younger and might have more energy to hold down a job. Even if you only put in a few hours a week and bring home a modest paycheck, every dollar you earn as a senior is a dollar you won't have to take out of your IRA or 401(k) plan.
Plan ahead of time to stress less
It's natural to worry about running out of money in retirement, and a good way to make that happen is to withdraw from your savings at random without putting thought into the process. A better bet? Come up with a solid strategy ahead of retirement, whether on your own or with the help of a financial advisor you work with.
You can always make adjustments to your strategy during retirement as needed. But it's really important to start off on the right foot.
