How to Make Your Money Last in Retirement

There are many unforeseeable events, such as the economy, inflation, and your own health

There are many unforeseeable events, such as the economy, inflation, and your own health, that can adversely affect your retirement income and undermine your retirement plan. Ask yourself if your retirement plan is enough to cover costs such as a nursing home or living assistance, and if you will be able to keep up your current desired lifestyle. With some careful planning, you can take some active steps to help your money last.

Create a Budget

Before you invest for retirement, decide on the kind of retirement you desire and anticipate the expenses you will incur to live that lifestyle. The best way to plan for your retirement is to create a budget based on the income and expenses you expect to have. Decide which expenses are necessary and which ones you can live without. Also, be sure to factor in unforeseen expenses such as inflation.

Should your monthly retirement income still not be enough to cover your living expenses, then you may have to consider liquidating or converting some of your assets into cash. However, this should be done only as a last resort.

You need to identify the potential risks to your retirement and address them in your plan.

Insufficient planning, retiring too early, collecting social security too early, debt, serious medical expenses, and inflation are among some of the most prevalent risks to a financially sound retirement.

Allocate Your Withdrawal Rate

The amount of money you allocate for retirement is a very important factor in determining how long your money will last. How much money you spend or withdraw during the first years of retirement can have a significant impact. You must first decide on a safe withdrawal rate that is based on the expected length of your retirement.

A good withdrawal rate for those who expect to spend 20 to 25 years not working is between 4 percent and 5 percent per year. Those whose retirement may last over 30 years should consider withdrawing between 3 percent and 4 percent per year during retirement.

These withdrawal rates may be adjusted by factors such as asset values and inflation. For example, if you plan on withdrawing $18,000 per year and there is 4 percent inflation, you may then choose to withdraw $18,720.

If your assets drop in value, then you should consider cutting your expenses and withdrawing less money so that you will not run the risk of running out of money.

Avoid Tax Penalties

Avoid taking early withdrawals from retirement accounts such as traditional IRAs and 401(k)’s by letting them grow until you reach the age of mandatory distribution (usually after the age of 70 ½). Try to live on other assets, preferably non retirement assets, which do not incur a tax penalty for early withdrawals. Roth IRAs can be withdrawn after five years without penalty.

One way to avoid tax penalties is to take out equal periodic payments based on how long you expect to live. However, once you decide to make withdrawals, you may not be able to reverse your decision or the amount of the payments.

Investment in Stocks

Another important step to ensure that you do not outlive your money is to consider investing prudently in stocks. Some financial advisors recommend that a substantial part of an investment portfolio be in stock investments in order to have enough money to offset the effects of inflation during retirement.

Immediate Annuities

Consider investing in lifetime income immediate annuities. This financial product can supplement your retirement income for as long as you live. Annuities are like pension plans in that they provide you with a monthly income. You make a lump sum payment to an insurance company which then agrees to pay you an income for the remainder of your life. You can also choose a plan that accounts for cost of living adjustments.

Another advantage of immediate annuities is their fixed income, which means that you are guaranteed your payment amount regardless of what is going on in the market. You may also opt for an annuity with a variable rate. This kind of annuity carries some risk. It rewards you when the market is doing well, however, it will expose you to some risk should the market plunge.

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