If retirement is on the nearby horizon, it’s time to reorganize your thinking about managing your money. Until now, you were focused on how much money you would need to retire comfortably. Now it’s time to figure out how to make your money last your lifetime. Here are some of the key factors you should consider, on both the investment and the withdrawal sides of the ledger.
As you step into retirement you naturally become more risk averse. This is your entire pool of retirement money, built up over the years inside your 401(k) or IRA, or in the value of your home, along with any other savings. Your investments have benefited from the longest bull market in history.
But now you won’t be contributing any more money after retirement. That means you won’t be able to take advantage of low stock prices in the inevitable bear market. Moreover, if the bear eats your savings, the money is just gone. So it’s time to take a new look at your risk tolerance.
—Income vs. principal
You want to avoid digging into your savings to maintain your retirement lifestyle. But that’s just not possible — especially in these days of low interest rates on safe investments. Higher yields always come with more risks. And those risks are not always readily apparent.
So how do you approach this challenge of making your money last as long as you do? You’ll need some growth, which the stock market has always provided. And you’ll need liquidity for withdrawals, which will soon be required. You don’t want to be forced to sell stocks in a bear market, at just the wrong time.
Making investment and withdrawal decisions requires some complex financial calculations. It’s best done by process called Monte Carlo Modeling. Despite the name, it has nothing to do with gambling. Rather, it is a computer modeling of multiple variables, including historical ranges of stock performance over multiple time periods. The result gives you reasonable probabilities of success for a specific investment and withdrawal strategy.
Most mutual fund companies such as Vanguard and Fidelity can do this for you. Or a fiduciary financial planner will have access to software that models both investment and withdrawal scenarios designed to have the highest probability of making your money (and your spouse’s) last your lifetime.
—Time and money
Time can make your money grow — but it can also make your money disappear! The required minimum distributions (RMDs) are designed by the government to empty your IRA by your projected mortality date — so they can collect taxes! But what if you live longer? That’s why you need additional money set aside — or perhaps a deferred income annuity that starts a payout at age 75 or 80, to bolster your retirement savings.
And never forget that inflation takes a big bite out of your money over time. At just 3 percent — the historical inflation rate — your buying power is cut in half in less than 25 years! The antidote to the time factor is working longer and delaying retirement plan withdrawals for as long as possible, as well as waiting to take Social Security until full retirement age (or, better yet, age 70).
Steve Vernon is a research scholar at the Stanford Center on Longevity and author of “Retirement Game-Changers,” a new book about planning for retirement living. You can find his work at RestofLife.com. Vernon’s research says the choice of when to start Social Security is the most important decision you’ll make, because it is the foundation of most retirement income — and because it is indexed to inflation from a higher base if you delay your start date.
Vernon suggests creating a “retirement bridge” payment for yourself by withdrawing a monthly amount from your retirement savings equivalent to what your Social Security check would be — meanwhile delaying the start of your real Social Security check. He notes that for every year you delay applying for the benefit (up to age 70) you get an 8 percent increase in your check. Vernon calls it “a significant rate of return.”
And Vernon advises: “It might seem scary, but don’t be paralyzed by fear. Instead use that fear to motivate yourself to learn about your options and get help if you need it to make an informed choice.” I heartily endorse that Savage Truth.