How Long Will My Money Last?

This title, including the article, is specifically curated on the probable longevity of your retirement savings. A sizeable nest egg is the saviour and offers a profound sense of security during retirement. And, it is the one question millions panic of, given the importance of financial stability needed to see us through retirement and beyond.

How long your money will actually last is quite debatable and, rests on the degree of our financial literacy and other external, unforeseen circumstances. With the increased cost of medical expenses and, uncertainty becoming all the more relevant, the possibility of exhausting savings rapidly worries retirees.

Apparently, the constant worrying about the duration your retirement money will last will have negative consequences on your daily performance with factors affecting your health too.

Factors Affecting Retirement Savings

Figuring out the exact number of years your retirement savings will last is tricky and is often half-baked. Several components like pensions, if any, social security account, returns, inflation, unexpected expenses and others drastically affect the longevity of your nest egg. Your standard of living and your lifespan also play a significant role in determining the savings for your retirement.

However, still, making a calculated analysis of your savings, taking your investments and annual expenses into account can give you more-than-a-draft of your financial status.

Ways to make your Nest Egg last Longer 

The 4% rule

Sticking to the 4% rule allows you to safeguard your retirement account from deteriorating early. The rule specifies how much you should withdraw from your retirement funds every year. The rule ensures steady income while also maintaining the balance through an incoming flow of money.

The rule should be followed every year with an inflation adjustment. This consists of dividends too and, is a safe bet to ensure a strong investment account. Life expectancy plays a great role here as several expenses, including medical costs, can increase with an increase in age.

Inflation in the 4% Rule

One thing to note in this case is, you need to increase the rate to keep the effects of inflation under control. You can choose to increase the rate by 2% every year or match it with the actual inflation rate.

But there are circumstances where the 4% rule doesn’t work in favour of the retiree. If your portfolio has high-risk investments, it can drain your account during a market downturn. Moreover, you have to be in control of your withdrawals and keep away from violating the rules. Drawing excessively cuts off the principal amount and, impacts the compound interest directly.

The dynamic withdrawal

There are some restrictions in the 4% rule, resulting in limited withdrawals. The money withdrawn every year is only adjusted by inflation. You cannot draw much beyond the limit. To combat this, a dynamic withdrawal option allows you to adjust your withdrawals to investment returns.

The income floor strategy

This works on preserving your stocks even during a market fall and, ensures savings for the long-term. You can set aside a specific amount to cover your monthly essentials through social security or annuity. A single annuity can be a large sum to enhance your income floor.

The Importance of Taxes

Taxes play a huge role in determining the size of your nest egg. There should be a place for marginal tax rate while calculating your retirement income. Check the following:

Standard taxable brokerage account

This tax will be charged every year on your income in case your savings are not in retirement accounts like 401(k), 403(b) or IRA. Tax is charged on dividends and interest earned and, also on capital gains. And, capital gains are taxed at a whopping 15%.

Pre-tax retirement account

This comprises of 401(k) and IRA accounts and, the amount you deposit in a year is excluded from tax. However, the amount you withdraw is taxable. Tax payment on capital gains on a yearly basis is also not required.

After-tax retirement account

It’s highly beneficial to have a 401(k) or a Roth IRA account. You’ll be free of taxes in retirement since you’ve already paid taxes on deposits. What’s more? Your withdrawals are 100% tax-free.

A Balanced Investment for a Bigger Retirement Nest Egg

A sure shot way to keep your retirement savings swelling is to create a powerful, diversified portfolio. Just like a well-balanced meal is important for our overall good health and energy, a well-balanced investment portfolio keeps you financially strong and secure during retirement. Your portfolio should have a good mix of:

  • Stocks
  • Stock Index Funds
  • Bonds
  • Certificates of Deposit
  • International Equities
  • Cash

The asset allocation works in your favour depending on your age and your risk tolerance capability. Also, a proportionate balance of equities and fixed income in your portfolio is important to keep pace with inflation. Investment returns always fluctuate with different market conditions. A well-allocated portfolio ensures protection against other significant losses and, your portfolio enjoys a smoother performance. This eventually helps your savings to increase big time for your retirement.

Changing and Rebalancing Your Portfolio

Changing asset allocation is usually required as you arrive closer to your investment goals. It is also important when there is a change in your financial situation, change in risk tolerance or even a change in financial goals.

If you are not in for changing your portfolio, you can consider rebalancing the same. This involves increasing the proportion of stocks when the stock market is happening. Rebalancing is what most savvy investors prefer to do. It’s about getting your portfolio back to its original shape in case of fluctuations in alignment. By doing this, you can get your asset categories to a more uniform level.

Rebalancing your portfolio is recommended every six to twelve months or better when there is substantial fluctuation in the relative weight of a particular asset class.

Whether it’s changing your portfolio or rebalancing it, it should be done infrequently to derive the best possible results.

The Order of Retirement Income Withdrawal

Withdrawing your retirement income should be from each category and, in a particular order. These include:

  • Bucket one should have enough cash to comfortably cover annual expenses
  • Bucket two should include fixed-investments and, a year’s worth of expenses should transfer to the cash basket. With this, you can cover upcoming expenses
  • The third bucket, filled with equities, should be withdrawn only during an overflow. At the end of the year, you can sell excess equities and refill your fixed income and cash buckets

You should have the patience and the perseverance to wait for a substantially long period before your equities overflow. Your fixed income and the cash buckets can hit an all-time low during such a phase. Don’t become a victim of your own emotions and sell away your investments at unfavourable times.

The Pay-Cut Rule

This rule is apparently useful during the bear market. When the market is low, it affects your portfolio value too and, the withdrawal rate increases. The rule secures your retirement income by instating you to cut down the annual withdrawal by a specific percentage. It provides the flexibility needed to ensure fluctuating market conditions.

The Prosperity Rule

This is the exact opposite of the pay-cut rule. You can enjoy a raise up to the time your portfolio enjoys a positive run in the market. The monthly withdrawal is increased in proportion to the increase in the consumer price index. You enjoy a higher level of retirement income with the ability to maintain your purchasing power.

Retirement Income – In a Nutshell

Under any circumstances, you need to take a disciplined approach and follow the rules to keep your investment portfolio in great shape and ensure a sizeable nest egg for a comfortable retirement. If you are new to this field, pause and take professional guidance. Learn new skills one after the other and, always make the right financial decisions to generate and maintain a lasting retirement income.

Before implementing your own retirement income plan, educate yourself thoroughly about the basics and advanced methodologies of investment and retirement income. You can also take professional advice from an expert who is familiar with the latest tools and techniques in this field.

Always plan your retirement income on the lines of the following questions:

  • What will my savings cover in my retirement?
  • How much do I need to save for my retirement?
  • How much should I save each year for my retirement?
  • How can I make my retirement savings last?

Devise an action plan for every question and consider all the necessary inputs to come up with practical, in-depth answers capable of initiating to lay the foundation for a strong nest egg.

Also, decide the best time to draw benefits from your social security account. As a matter of fact, waiting till you reach 70 is not always the best option.

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