How to make your retirement savings last

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Many Americans close to retirement are concerned that they will not have enough savings to last throughout their retirement. According to Northwestern Mutual’s recently released Planning and Progress Study, 85% of Americans report anxiety about their finances. Two-thirds believe there is a chance they will outlive their savings; one-third think the likelihood is 51% of more; and 14% think they will definitely outlive their retirement savings. However, 44% report they have not taken any steps to address this situation.

Here are several important things you can do if you’re concerned about whether your savings will last.

1. Assess your retirement needs. There are many online retirement calculators that can help you determine how much savings you will need. By taking a close, objective look at your financial situation, you are in a better position to decide whether you’re on track and what to do if not.

A crucial part of determining your retirement savings needs is figuring out how long your savings will need to last. Life expectancies are rising, and there’s a good chance you might outlive those. A 65-year-old man in average health has a fifty-fifty chance of living to age 85, but also has a 25% chance of reaching age 92 and a 10% chance of living to 97.

This is good news, but can also be an unpleasant surprise if your finances aren’t prepared. Your lifestyle and family health history are the biggest determinants in your individual longevity. Using life expectancy tools can give you a estimates, but remember that these are averages and you may very well be around longer, and you will want to plan accordingly.

2. Create a budget. Maintaining a budget, with your income and expenses listed and accounted for, can help you get and keep your retirement savings and spending on track. The majority of people don’t keep a budget, and have only a vague notion of how much they will spend in retirement.

A budget doesn’t have to be comprehensive and detailed, but having a good idea of your major expenditures and sources of income can help you keep a handle on your spending, and see which areas you can rein in if needed. Your budget should distinguish between essential expenses, which you must pay, and discretionary expenses, which you can adjust as necessary. There are many online tools to help you create and maintain a budget. Some are linked on the resources page.

3. Increase your savings. If you find yourself short of retirement savings, the best way to address this is to save more. If you’re still working, enroll in employer-sponsored retirement programs such as 401(k)s and take advantage of employer matching. Also open an individual retirement account such as a Roth IRA.

Both of these allow you to save on a tax-free or tax-deferred basis. It’s best to save when you’re younger and can put the power of compounding to work, but saving more even later in your working life can have a significant impact.

4. Don’t be too conservative with your investments. Once in retirement, keep in mind that your savings must continue to grow if they are to last for two decades or more. You will not need all of your retirement savings as soon as your retire; most of it is for future years.

Some respected financial researchers are now suggesting that you keep a significant portion of your retirement savings in stocks in order to increase the likelihood that they will grow fast enough to keep up with your withdrawals and with inflation.

5. Determine an acceptable withdrawal rate. While in retirement, you need to withdraw from your savings the amounts needed to cover your expenses, but not so much that you will risk running out late in life. The exact amount depends on your situation and is the subject of much research and discussion among financial specialists.

Traditionally, a 4% withdrawal rate has been proposed. In recent years, some advisors suggest a lower rate of 3% or even 2%. Whatever withdrawal rate you choose, you will have to adjust it based on stock market performance. When the market is down, you may want to reduce your withdrawal rate for couple of years to compensate. When the market is up, you can increase your withdrawals, or invest the extra for future needs.

A Monte Carlo simulation or FireCalc’s calculator, linked on the resources page, can help you determine how your savings will likely fare under various future stock market scenarios.

This video gives more suggestions about making your retirement savings last.

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