How to avoid going broke in retirement
(MoneyWatch) With average U.S. life expectancy still rising, if you look after your health it's quite possible you might live into your late '80s or beyond. As a result, people who retire in their 60s could be retired for at least two or three decades. That should be a good thing -- except if you run out of money in your 70s or 80s!
If you're like most baby boomers, you haven't put enough away in retirement savings to maintain your current lifestyle, so you'll need to squeeze as much income as possible from what you did sock away. And unless you'll be receiving significant benefits from a traditional pension plan, which provides a lifetime monthly income, you should be certain to manage your retirement savings so you don't outlive it.
- Retirement income scorecard: Interest and dividends
- Retirement income scorecard: Systematic withdrawals
- Retirement income scorecard: Immediate annuities
Unfortunately, research suggests many people simply "wing it" when it comes to retirement planning and drawing down their savings. They simply withdraw what they need for living expenses and hope the money lasts.
Hope is never good strategy! If you spend your retirement savings without planning, there's a good chance you'll go broke in your retirement years.
Let me instead introduce you to a better strategy to draw down and invest any type of retirement savings you have, whether a straightforward savings account with no special tax features; a 401(k), 403(b), 457 or cash-balance plan; or a traditional or Roth IRA.
Don't spend savings
When it comes to living off your retirement savings, the most important strategy you can adopt is this: Don't spend your savings!
Can that be right? Absolutely. The concern is that after immediately after retiring, you'll have accumulated a tidy sum to spend during retirement. It'll look like a lot of money, and you may think you can easily afford to buy that boat or take that expensive cruise you've been dreaming about. You might start spending your retirement savings on the things you've been planning for and pull out whatever you think you need to cover daily living expenses.
If you're not careful, you'll exhaust the balance in your retirement accounts before too many years have gone by. You may have plenty of years to live, but you'll be broke and faced with some hard choices, such as returning to work, drastically scaling back your living expenses or moving in with your kids.
Instead of spending haphazardly, what you should do is consider your retirement savings as a monthly retirement income generator. Spend no more than the amount of your paychecks. Since most of us already live paycheck to paycheck during our working lives, adhering to this financial discipline when we retire shouldn't be too hard. If you plan your spending in retirement, there's a good chance you won't go broke.
For the sake of convenience, I'm going to call these monthly retirement income generators "RIGs" for short. These RIGS are critical to creating a financially secure retirement. In order to better understand this concept, it might help to think of your RIGs as vehicles that will go the distance and carry you through a secure retirement. And as with cars and trucks, RIGs come in several models with a variety of extras that can be customized to suit your needs.
But don't feel overwhelmed. There are only three basic types of RIGs you can use to generate retirement income from savings (which I discuss in detail in my latest book, "Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck"). To help you create a financially secure retirement, my next few upcoming posts will summarize these three types of RIGs and discusses their variations. Stay tuned!
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The income generated using the RMD formula will depend on how much you earn on your portfolio.
Assuming it is say 3% (steady), your income will increase till about 90 and then start to decrease. If one assumes say 3% inflation (steady), your income will start a little bit shy of the 4% rule of thumb and grow increasingly shy of that goal.
If you earn .04, you will stay in shy proximity to the goal through 85 before tailing off more steeply.
If you earn 5%, you'll be a bit on the plus side of the goal till starting to tail off in the mid-90's.
Of course earnings aren't steady and some weak years will hurt since you are withdrawing money, but the plan has some workability.
The income generated using the RMD formula will depend on how much you earn on your portfolio.
Assuming it is say 3% (steady), your income will increase till about 90 and then start to decrease. If one assumes say 3% inflation (steady), your income will start a little bit shy of the 4% rule of thumb and grow increasingly shy of that goal.
If you earn .04, you will stay in shy proximity to the goal through 85 before tailing off more steeply.
If you earn 5%, you'll be a bit on the plus side of the goal till starting to tail off in the mid-90's.
Of course earnings aren't steady and some weak years will hurt since you are withdrawing money, but the plan has some workability.
Guess what - a lot of what they spent their money on was their kids. Education, toys, electronics - playing in the backyard and making do was not good enough for their kids. So stop whining about what we did wrong and fix it for you're so damn smart.
Try and remember by the way that Boomers grew up during high inflation - the likes of which you guys have not yet seen.If they forgot to mention THAT in school, money rules are different during inflation - saving is NOT smart and BORROWING is. The biggest mistake most boomers made was not to understand that when inflation dropped, the rules changed back to traditional frugality.
So always keep the macro economic situation in mind.
Most importantly, while I fully embrace saving and expect a comfortable and planned retirement, don't delay all your dreams. Yes, you don't want to be broke in your 90's.
Even with the higher life expectancy, a good number of us won't see that number. Save for fun as well.
Baby boomers have put this failure/responsibility on their kids shoulders.
They used the time needed to make a change to honor themselves (Tom Brokaw "Boomers", an inside look at history's most influential generation) instead of facing a tough task. Additionally, they refuse to empower their kids this very day so they can do do what the "BOOMERS" failed to do.
I think everything you have said is double talk in order to avoid responsibilities for your past decisions.
If you empower me, I am going to force all "BOOMERS" to take at least a 7 year early retirement so that those jobs can be filled by your children. (Americans). This fixes the unemployment rate and allows my generation time to save for our retirement.
However, the "baby boomers" would rather stay in control and OUTSOURCE jobs to save themselves. Basically, you're selling your own kids down the river.
BTW The "baby boomers" parents are the Greatest generation ever! Tom Brokaw is obviously an egomaniac!
I agree that if you invest in a portfolio balanced between stocks and bonds, wait until age 70-1/2 to start drawing down your retirement savings, and use the IRS minimum distribution table to calculate your annual withdrawals, that's a reasonable way to generate retirement income. It's one of the ways that I describe in my book Money for Life.
Best regards, Steve