It’s probably safe to say that many of us are concerned about having enough money to cover our retirement years. In fact, some surveys have shown that we are more frightened of running out of money than we are of dying. What can you do to help alleviate these fears?
Your first move is to create a retirement income strategy, and you’ll want to develop it well before you need to use it. While there are many ways to develop such a strategy, you may want to consider these three key elements:
Your withdrawal rate is the percentage of your portfolio you use every year during your retirement. So, for example, if you retire with a portfolio worth $1 million and you choose a 4% withdrawal rate, you’ll be taking out $40,000 per year. Your withdrawal rate will depend on several factors – your age at retirement, the size of your portfolio, potential earned income, date at which you start taking Social Security, and so on. Clearly, when deciding on a withdrawal rate, you’ll want to reach the “Goldilocks” solution – not too much, not too little, but just the right amount.
Your reliance rate is essentially the percentage of your overall retirement income that comes from your investment portfolio – your IRA, 401(k) and other accounts. It’s called a reliance rate because you rely on this portfolio for your income. The higher your reliance rate, the more you will rely on your portfolio to provide income during your retirement, and the greater your sensitivity to market fluctuations.
The more sources of lifetime income you have – such as Social Security and a pension from your employer – the less you may be relying on your investment portfolio to cover your retirement goals. However, many private employers have moved away from pensions in favor of 401(k)-type plans, and Social Security will only provide about 40% of your preretirement income in retirement, assuming your earned income is average for U.S. workers, according to the Social Security Administration. Consequently, you may want to consider options such as annuities, which can provide lifetime income benefits.
It will take careful planning to put these three factors together in a way that can help you build enough consistent income to last throughout your retirement – which could easily extend two or three decades. And there’s no single formula for everyone. For example, while an annuity could offer lifetime cash flow and help you reduce your reliance on your investment portfolio, it also involves fees and expenses, plus lower liquidity than other sources of income, so it may not be right for everyone.
Fortunately, you don’t have to go it alone when taking all your retirement income factors into account. You may want to work with a financial professional – someone who can evaluate your individual situation and then recommend retirement income solutions based on your appropriate reliance rate, withdrawal rate and potential income sources. By getting the help you need and by following a suitable long-term strategy, you can ease some of the stress that comes from wondering if your life span might eventually exceed your financial resources.
Aaron Glosser is a certified financial planner for Edward Jones. He can be contacted at 802.655.5512 or Aaron.Glosser@edwardjones.com. His office is on Water Circle in Colchester.
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