Planning for a Lifetime of Savings
As you approach retirement, it’s essential to consider the risk of outliving your savings. With careful planning and management, you can ensure that your hard-earned money lasts throughout your golden years.
Understanding Longevity Risk
Longevity risk refers to the chance that you will outlive your retirement savings. This risk is often underestimated, as population-wide averages can be misleading. For instance, while the average lifespan for a woman is 79.3 years old and 73.5 for a man, those who reach 70 can expect to live between 80 and 90 years old. This significantly impacts retirement savings, as a typical household should anticipate at least 20 to 25 years in retirement.
Managing Income
To make your savings last, it’s crucial to manage your income effectively. Start by determining your Social Security benefits, which are guaranteed for life and can supplement your retirement portfolio. Next, consider your retirement portfolio earnings, such as those from IRAs, 401(k), or 403(b) accounts. A popular strategy is the 4% rule, where you withdraw 4% of your portfolio each year for 20+ years in retirement.
Addressing Longevity Risk
To address longevity risk, consider allocating your portfolio with income assets, such as bonds, dividend-stocks, and savings accounts. These assets generate returns without requiring the sale of the underlying asset. Annuity contracts can also provide a fixed payment for life, but be aware of inflation risk. Balancing your portfolio with equities and growth-oriented assets can help mitigate this risk.
Spending and Taxes
The other half of managing longevity risk is spending. Consider your tax situation, as withdrawals from pre-tax IRAs or 401(k) accounts are subject to income taxes. You may want to roll over your IRA into a Roth IRA, but this would require sacrificing a significant portion of the account to upfront income taxes. Don’t forget to anticipate required minimum distributions (RMDs) and consider the lifestyle you want to maintain in retirement.
Determining Your Needs
To ensure your savings last, assess your rate of spending and projected portfolio income. If this looks sustainable well into your 90s, you’ve likely achieved the right balance. If not, consider investing for more growth or finding areas to cut spending. A financial advisor can help you determine your needs and develop an appropriate strategy.
Staying on Track
Remember to keep investing even in retirement, as you may have 25 to 30 years to enjoy the returns from your portfolio. Maintain an emergency fund to cover unexpected expenses and consider high-interest accounts to earn compound interest.
By following these strategies, you can ensure that your $950,000 IRA lasts throughout your lifetime, providing the financial security you deserve in retirement.
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