It’s the question that plagues almost every person saving for retirement: “How do I know this will be enough?” The simple answer: You don’t. Whether you’re in your 20s and just beginning your 401(k), or nearing retirement and examining the tentative figures set aside for you, don’t fret. There are lots of reassuring ways to ensure that you don’t deplete all your savings when you’re retired. Follow these simple steps:
Start young. It’s never too early to start saving for retirement — even in your teens and twenties! If your job doesn’t offer a retirement plan, you may consider starting your own independent retirement fund and invest as much as you feel comfortable. Time is your most valuable asset when it comes to retirement savings.
Keep your savings steady. Some people believe that if you focus solely on your withdrawal rate when you retire, you’ll be able to calculate precisely where you’ll end up without fail. However, this isn’t necessarily the case, as stocks and bonds are very unpredictable.
"Instead, look at savings rate, which, because of its mean reversion, tends to be much less volatile in terms of what consistently works historically," says Wade Pfau, professor of retirement income at the American College. While there isn’t a one-savings-rate-fits-all percentage, it’s important to find what works for you. Pfau recommends a baseline of 16-17 percent as a starting-off point.
Make sure you’re financially ready. It’s common for people who are qualified to retire to do so. But just because you’re eligible doesn’t always mean that you should in fact retire. What if your expenses are too hefty for what you’ll receive when you stop working?
“The number one thing to do is to make sure that you have done a thorough assessment of what your expenses are likely to be and how much income you will need to cover those expenses," explains Dallas Salisbury, president and CEO of Employee Benefit Research Institute. Once you examine your every day expenditures, you’ll be able to calculate if you’ll be fiscally ready to retire when you’re eligible — and if not, you may find that you’d prefer to stick it out at your job a bit longer until you’re ready to retire money-wise.
Buy a private annuity. Many insurance companies allow you to purchase a private annuity so that you’re guaranteed a defined income for life when you retire. Take social security for example, a common annuity among most Americans, which usually offers an annual cost-of-living payment. With social security, age 62 is the earliest you can get a benefit, but keep in mind that the longer you wait, the higher the payout will be and sometimes it pays (literally) to wait several more years. One caveat: Not all annuities provide protection against inflation, so be sure to ask your insurance company questions and get one that does offer this.
Don’t rely solely on retirement. One of the biggest mistakes some people make is living above their means with the notion that their checks will bail them out every time they need cash. One of the simplest ways to assure you don’t run out of money is to not increase your spending. Also, if you’d like, take up a part-time job or paid hobby — something you’ve always wanted to do. Having a little extra cash flow ensures that you have plenty of funds rolling in.
Modify your withdrawal rate. Contrary to popular belief, your withdrawal rate is not set in stone throughout your whole retirement.
“The two unknown variables when it comes to building an income strategy are how long you are going to live, and what the market returns are. If you knew both of these variables with absolute certainty, you could know exactly the amount you could take from your portfolio,” explains David Blanchett, head of retirement research with Morningstar, a Chicago investment research firm. He recommends adjusting your withdrawal rate every year or so (or whatever given period makes sense for you) based on your life expectancy and current and future spending habits.
The best times to re-evaluate your withdrawal rate is when the market drops, there’s a change in the allocation in your portfolio or if something unexpected happens that alters your retirement expectations.