How To Make Your Retirement Money Last

 One of the most important problems facing a person at the cusp of retirement is how to survive financially during the golden years. A healthy 65-year old man will live about 19 more years, on average. A healthy 65-year old woman will live about 22 more years, on average. Those are just averages. Some won't make it that far. Others will live to their 90's. There's no simple answer to the problem of financing a long retirement. Much depends on the person's individual circumstances. Perhaps you, your parents, or your grandparents are facing this question. Here are a few thoughts. 

 1. Most retiring Americans will have less than $100,000 in savings and a house. They will be entitled to Social Security, and the lucky ones will get a pension. The pension will probably not be adjusted for inflation. A person or family in this situation should try to live on Social Security and any pension payments. Hold onto the savings and the house for the big expenses that may well be coming. Many health care costs (like assisted living) aren't covered by Medicare or Medicaid. Also, large purchases like a new car are best made with cash. When you're 70, you don't want to enrich banks with interest payments. 

2. For retirees with substantial savings, such as $500,000 or $1,000,000, the conventional wisdom is that if you retire around 65, have your money invested in a diversified portfolio and figure on living about 20 more years, you can withdraw about 4% of the savings the first year of retirement, and then adjust the amount of withdrawals for inflation each year thereafter. For example, if you start with $1,000,000, withdraw $40,000 in year one of your retirement. We'll assume that inflation remains at its historical average of about 3% per year. In year two, withdraw $41,200 (the original $40,000 plus $1,200 or 3%, for inflation). In year three, withdraw $42,436 ($41,200 plus $1236, or 3% more, for inflation). Remember that you'll also have Social Security and perhaps a pension, so the withdrawal probably won't be your only income. If your family has the longevity gene and you figure your retirement might last 30 years, start with a 3% withdrawal and adjust for inflation. To use our $1,000,000 example, withdraw $30,000 in the first year of your retirement, and adjust upwards for inflation in succeeding years. Where do these 3% and 4% numbers come from? A mathematical technique called a Monte Carlo simulation. It is a way of calculating probabilities--in this case, the probability that you might outlive your retirement savings. Is the Monte Carlo technique foolproof? Not more so than anything else that human beings have come up with.  The 4% concept has been criticized, but often as being too cautious.  So it's probably a reasonable approach.

4. Another approach to managing retirement savings is the time-honored rule of spending the earnings, but never touching the principal. One advantage to this approach is you will always have your principal. Your spending may fluctuate widely from year to year, especially if the stock market does one of its periodic belly flops. But your principal will remain. Its value will erode because of inflation. You can counteract the inflation by not spending all your income in good years. Set some aside and give your principal a boost. You'll be glad you did if, later on, you hit choppy water. Spending only investment earnings and preserving principal will mean that, on average, you'll probably spend less than the 4% initial level approach prescribed by the Monte Carlo approach. But if you get more peace of mind from never touching your principal, then don't touch your principal. Your retirement years should be as worry-free as possible. 

5. Some people advocate the use of annuities to make retirement savings last. There are many types of annuities, and most of them are suitable only for wealthy people. But if you have $500,000 or more, certain kinds of annuities might make sense. Ones that provide a predictable monthly payment (such as a lump sum immediate fixed annuity or a lump sum inflation adjusted annuity) might help you avoid spending the rest of your savings too fast. But remember that you lose the money you invest in the annuity if you die early. For example, if you are 65 and invest $200,000 in a lump sum immediate fixed annuity, and get hit by a truck the next month, you lose all $200,000. (There are annuities that mitigate this problem, but at the cost of lower monthly payments to you.) And there's also the risk that the insurance company that sells you the annuity may go out of business. If so, you could lose at least a large part of the money invested in the annuity. Annuities may be right for some people. But you have to think about them carefully.

 6. Work as long as possible to build up your Social Security credits, and your pension credits if you're entitled to a pension. The more continuing income you have, the less you'll need to tap into savings. To learn about how Social Security determines your credits, go to https://uncleleorumbles.blogspot.com/2007/05/mysteries-of-social-security-retirement.html. Also consider delaying the time when you start to collect Social Security benefits. That will increase the size of your monthly payment (until you reach age 70, when these increases stop and you should therefore start taking Social Security no matter what). See https://uncleleorumbles.blogpost.com/2007/05/mysteries-of-social-security-retirement_02.html.  

How you approach the problem of managing your retirement money is a matter of personal choice. Some want to live it up while they are still healthy. They travel a lot and get to know many maitre d's. They don't care about leaving an estate behind. Others want to make sure they don't run out of money and spend cautiously. They know it's hard to recover from financial setbacks when you're 75 or 80. Early spending in retirement is costly to your long term financial security, but it's not wrong. Whatever your choice, make sure you understand the consequences.  If all this makes you queasy, save some more before you retire.  Retirement's financial problems are always easier the more savings you have.