Most of us probably muse about our retirement from time to time, wishing it would arrive sooner and thinking of all the fun things we'll do and what a happy time it will be. Go ahead and do that! But retirement can also be a difficult time for many people -- if they're in danger of having their nest egg run dry too soon.
Here, then, is a look at some ways to set up a retirement so that you don't run out of money before you run out of breath.
Image source: Getty Images.
Building your nest egg
You'll clearly run out of money in retirement if you haven't started out with a sufficiently large nest egg. And, sadly, that's the case with many people. According to the 2023 Retirement Confidence Survey, fully 33% of respondents have less than $25,000 in savings and investments (excluding the value of a primary home).
So, how much do you need to retire with? The answer is different for everyone, and it depends on factors such as your spending habits, your region's cost of living, your health and expected longevity, and so on. Many people are shooting to amass a million dollars by retirement, but even that might be too little, especially if you're still young. Inflation can cut the purchasing power of your money in half over just 25 to 30 years.
The table below shows how much you might amass over time if you save and invest regularly, and average 8% gains annually:
|
Growing at 8% for |
$7,500 invested annually |
$15,000 invested annually |
|---|---|---|
|
5 years |
$47,519 |
$95,039 |
|
10 years |
$117,341 |
$234,682 |
|
15 years |
$219,932 |
$439,864 |
|
20 years |
$370,672 |
$741,344 |
|
25 years |
$592,158 |
$1,184,316 |
|
30 years |
$917,594 |
$1,835,188 |
|
35 years |
$1,395,766 |
$2,791,532 |
|
40 years |
$2,098,358 |
$4,196,716 |
Source: Calculations by author.
The table might help you see how much you should be socking away each year.
Focus on withdrawal strategies
As you build up your nest egg, you'll need to think about what withdrawal strategy makes the most sense for you. There are many possibilities, with the famous 4% rule perhaps the most well-known. It's not perfect, but it suggests withdrawing 4% of your nest egg in the first year of retirement and adjusting subsequent withdrawals for inflation. Here's what that would look like:
|
Nest Egg |
4% First-Year Withdrawal |
|---|---|
|
$100,000 |
$4,000 |
|
$250,000 |
$10,000 |
|
$300,000 |
$12,000 |
|
$400,000 |
$16,000 |
|
$500,000 |
$20,000 |
|
$600,000 |
$24,000 |
|
$750,000 |
$30,000 |
|
$1 million |
$40,000 |
|
$2 million |
$80,000 |
|
$3 million |
$120,000 |
Source: Author calculations.
Read up on other retirement withdrawal strategies, too, and consider other possibilities.
Assemble multiple income streams
It can help in your retirement planning to think in terms of income streams.
Social Security, for example, will deliver one income stream. (As of December, the average monthly Social Security retirement benefit was $1,905, or close to $23,000 for the year.) If you're lucky enough to have a pension, that will be another income stream. So will rental income if you own investment properties.
Dividends and interest could produce more income -- a portfolio worth $400,000, for example, with an overall 3% dividend yield will generate $12,000 in income annually. Annuities are another possibility.
Other possible income streams include a reverse mortgage, where you receive a lump sum or regular income from a lender -- using your home as collateral.
Strategies for not running out of money
It also helps if your income streams are ones that grow over time. Social Security benefits, for example, are typically increased each year. Dividends are also often increased every year, and ideally, the long-term portion of your stock portfolio will keep growing in value over time. If you receive rental income, you'll typically be able to raise rents now and then.
The more guaranteed your income, the better, too. Social Security income is guaranteed -- though there is the possibility that benefits will shrink if Congress does not shore up the program in the coming years. Annuity income, too, is guaranteed -- but it's only as reliable as the insurance company you bought your annuity from. So you might want to buy several annuities instead of one, and only from highly rated insurers.
Finally, to reduce your chances of running out of money in retirement, consider working a little longer. Doing so means your nest egg will have to support you for fewer years, and you'll be able to save and invest more. You may also get to enjoy employer-sponsored health insurance for longer, and by delaying when you file for Social Security, you can make your benefit checks bigger, too.
It's smart to think about how you'll fund your retirement starting now -- even if you're only in your 30s. Younger people have much more time in which their invested money can grow, after all. If you have a good plan and stick to it, you may enjoy a comfortable and financially secure future.
