Avoid this critical retirement planning mistake

(MoneyWatch) I was at a holiday party recently when a friend started talking to me about her retirement plans, hoping to get some free advice. I'm always glad to help out my friends, but my advice wasn't exactly what she was expecting to hear.

Helen, a single nurse in her mid-60s, said to me, "I've got $300,000 in my 403(b) retirement savings, and I need an annual income of about $25,000 per year in addition to Social Security. I should be OK if I take out this amount each year, right?"

I did the mental arithmetic in my head and realized that she'd be withdrawing from her retirement savings at a rate of more than eight percent per year. My response? "At that rate, you'll probably run out of money while you're still alive, most likely in your 80s. I know you're healthy, and there's a very good chance you'll live into your 90s. You'd be better off by starting with a withdrawal rate of four percent per year, and then if your investments do well you could increase your withdrawals down the road. This means you should start out by withdrawing just $12,000 per year."

Her response? "But I can't live on $12,000 per year!"

I continued by saying, "If you reach your 80s and exhaust your retirement savings, then you'll need to live on just Social Security. So consider your retirement savings as a generator of a lifetime retirement income and figure out how much income is reasonable to expect from your savings." (I encouraged her to learn more and told her I'd give her a copy of my new book, "Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.")

• Study: Serious lack of knowledge about retirement income
• 3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck
• How to maximize your Social Security payouts

Unfortunately, Helen's story is typical of the type of financial "planning" many people do for their retirement. They roughly estimate how much money they need each year for living expenses above and beyond their Social Security income. If their retirement savings are somewhat bigger than this annual amount, then they think they'll be OK.

Even surveys are showing that many people expect to withdraw from their savings at a rate of eight percent per year or higher, with the unfortunate result that most of them will likely run out of money before they die.

People who "plan" in this manner are hoping that their money will last for a lifetime without really doing any planning. Well, hope is not a good strategy. Instead, they should be learning about the different ways they can generate a lifetime retirement income and choose the method or methods that best meet their goals and circumstances.

Not only will this planning give them a better chance of having enough money no matter how long they live, it will also make them more confident about their retirement. The annual Retirement Confidence Surveys from the Employee Benefit Research Institute consistently show that people are less anxious about their retirement if they do the math to estimate how much savings they'll need to cover their wants and needs.

But back to Helen. Since she's a nurse, she can easily find part-time work after she retires from her full-time job to help her delay drawing down her retirement savings and postpone starting her Social Security benefits, both good moves to improve her retirement security. Meanwhile, she'll still be able to enjoy some free time because she'll only be working part time. With just a bit of planning, she can start making smart decisions about the rest of her life!

[Wgilcrist]

Reverse mortgage loans can meet your retirement needs if you currently own a home. Like the name "Reverse mortgage" implies, instead of making payments to pay-off a mortgage a reverse mortgage makes payments to you.


Thanks for share this.
http://www.reversemortgagelendersdirect.com/no-fee-reverse-mortgage/
http://www.reversemortgagelendersdirect.com/hecm-programs/

[AnnuityThinkTank]

I believe that most people never consider that their qualified plans (like the nurse's 403b, a 401(k), or traditional IRA have NOT been taxed yet. I speak to consumers every week that are so proud that they have accumulated $1 million in their 401(k) and feel that they are set for life. And please don't get me wrong, I am not trying to downplay $1 million dollar 401(k). That truly is a lot of money. But with rising tax rates, the fact that most people don't want to downgrade their way of living, and people living longer every year, the $1 million 401(k) can get down to zero is a short period of time. Especially if you are still needing $75,000+ a year in income to continue your lifestyle. I just read a great article titled, "How to retire with little money" that gave some great tips on how to retire using the smallest amount of retirement money as possible. Check it out here - http://blog.annuitythinktank.com/how-to-retire-with-little-money/

[Luke_Simonds]

Steve, thanks for posting another great article on retirement. I certainly agree that we all must formulate a plan to ensure adequate retirement income throughout our retirement years. The big unknown in this planning is of course the number of years to plan for given that it is impossible to know how long we each will live. For this reason, I hope that everyone who is not completely comfortable with their current retirement income projections spends some time to learn how annuities can be utilized to provide a guaranteed amount of income for life. Be sure to visit educational websites like http://www.annuity123.com/ to learn about the various types of annuities and their respective pros/cons.

[gtlenz]

What if Helen got a reverse mortgage? She could go with the line of credit option but not draw on it. Her line of credit would grow like a savings account, but the best part is it grows at whatever her interest rate is plus 1.25%. On top of that it is an adjustable rate program, so with interest rates being at all time lows, her future growth would go up as well. To learn more check out this free resource I've put together for seniors to learn about reverse mortgages: www.ReverseFAQS.com

[tawster]

Reverse mortgages are chuck full of fees and gotchas. It's more prudent to sell the house if it comes to that. I can't think of a solitary example where a reverse mortgage makes sense.