One of the most important financial questions you’ll ever have to ask yourself is how long your savings will last in retirement. This can help determine how much you’ll need to have saved prior to retiring, when you can retire, your lifestyle after you retire, and much more. But with so many factors influencing retirement savings, it can feel impossible to figure out. It’s true that without predicting the future, there’s no way to arrive at a perfect number, but there are a few strategies you can use to help inform your decision.
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Use the Four Percent Rule
Since so many factors can affect how much money you’ll need, it’s impossible to come up with a perfect number. But that doesn’t mean you can’t come up with a good estimate. To do this, you need to use the 4% rule. The 4% rule is a commonly used tool that can help you determine how long your retirement savings will last.
The concept is simple. If you have half of your investments in bonds and half in stocks, you should, theoretically, be able to withdraw 4% and every year after withdraw that same amount, plus inflation. This can be a great tool for helping you come up with an estimate of how much you’ll spend in retirement, but there are a few other factors you’ll need to consider as well.
Know Your Timeline
A major concern for many retirees is outliving their savings. In order to know how long your savings will last, whether using the 4% rule to estimate or another strategy, you’ll need to have an estimate of how long you’ll be retired. A man who is 65 today has a life expectancy of 84, while a 65-year-old woman has a life expectancy of 86 and a half. When calculating for retirement, though, you’ll likely want to assume a longer life expectancy. It’s always better to overestimate than to outlive your savings. A good rule of thumb is to plan for 30 years. If you retire later or earlier, this will obviously have an impact on your timeline and will need to be taken into consideration.
Create a Plan
How do you plan to spend your time in retirement? What you do in retirement will obviously have a major impact on how much you spend. As you approach retirement, you’ll want to consider what you expect your day-to-day life to look like and make sure it matches up with your budget. You may enjoy the idea of traveling, but if you have a limited budget, extensive international travel may not be possible. If you feel strongly about incorporating something specific into your retired lifestyle that isn’t currently in your budget, you could consider cutting back in other areas, working slightly longer, or even look into working part-time after you retire.
Besides helping you prepare financially, creating a plan can also help you prepare mentally. Retirement is an exciting time of life, but the transition is difficult for many people. By having a retirement plan in place, you can make sure you have realistic expectations and can transition into retirement more easily.
Account for Taxes
Many retirees underestimate how much they’ll still end up paying in taxes after they retire. The amount you’ll pay will vary depending on your tax bracket, types of retirement accounts, withdrawal options, and many other factors. The key is to understand how taxes will affect you and how taxes will affect the total amount you’ll need to live on. Due to the many different variables when it comes to retirement, taxes can be quite complex. Even if you didn’t previously work with a tax professional, it may be worth discussing the implications of taxes with a certified professional. Reach out to our team at Modern Family Asset Management to discuss your specific situation.
Prepare for Healthcare Costs
Another area where retirees often underestimate how much they’ll end up spending is healthcare. Planning for the costs of healthcare is one of the most difficult aspects of retirement planning. No one likes to think about long-term health issues befalling them, but planning ahead can help your retirement savings last longer. There are many things that Medicare doesn’t cover, and it may be worth considering purchasing Medicare Supplemental Insurance, also known as Medigap policies. For example, many necessary aspects of long-term care aren’t covered by Medicare, and without a policy that specifically covers these costs, you can end up spending tens of thousands of dollars out of pocket.
Work with an Experienced Financial Advisor
Retirement should be a time to enjoy yourself. You shouldn’t have to spend your retirement with the added stress of not knowing how long your savings will last. By planning ahead now and incorporating a few simple strategies, you can make sure you have the retirement you deserve. To make sure your retirement plan is sound, work with a trusted, experienced financial advisor from Modern Family Asset Management to discuss your goals and needs.