When people start planning for retirement, one of the most important questions they need to answer is “how much do I need to save to ensure I never run out of money.” It’s often difficult to give a definitive answer because no one can predict their life expectancy. Many formulas tell you to assume you’d live for 25 years after retirement. And the reasoning behind this is: if the average retirement age in the US is 65 and the average life expectancy is 79, then planning to live until 90 is a good enough bet.
However, this isn’t foolproof and you may end up living beyond the age you expect. Similarly, emergency expenses may come up during your retirement and place a strain on your income. Say your health deteriorates or you want to contribute to your granddaughter’s tuition. What happens then? How do you ensure your retirement income outlasts the number of years you have left?
Here are some ideas:
1. Delay your Social Security benefits
Social Security payments is one of the oldest forms of insurance for people who are retiring, yet it remains highly effective. And the payouts can be significant, even for the affluent. A wealthy couple may receive over $1 million in accumulated Social Security benefits during their post-work years. Another key feature of this type of insurance is that it was designed to continue paying throughout retirement, regardless of how long the recipient lives for, and payments are adjusted for inflation. Subsequently, it can be a dependable source of good income that lasts for as long as is required.
However, to maximize the Social Security payments, you need to hold out for a long time before you start filing for benefits. Financial advisors typically recommend waiting until 70 years before applying. So, this raises the question of, “how will I survive while waiting?” There are a number of options you can leverage during the early years of retirement. For example, you may start drawing from your IRA or pension funds. Alternatively, you can decide to set up a fixed index annuity beforehand.
2. Take advantage of annuities
Another way to build up your retirement income considerably, to the point where you don’t have to worry about outlasting it is annuities. An annuity is a type of insurance contract between an individual and a financial services company. It works just like a retirement savings account, but with some notable changes. Yes, annuities let you make contributions in the present and get payments in the future. And your savings earn yearly returns that’s in tandem with index funds like the S & P 500.
However, unlike traditional retirement plans, there is no limit to how much you can contribute. Furthermore, contributions to an annuity are tax-deferred when you make them, and no tax is deducted when you withdraw. This means it has the unique attribute of being tax-deferred and tax-free at the same time. As a result, annuities make it possible for you to save as much as you want in preparation for retirement. And your savings grow at a consistent rate, with protection against down stock market years.
You don’t have to depend on only retirement accounts for income when you stop working. If you have enough disposable income, you can invest, earn healthy returns, and make the most of compound interest. Let’s say that you’re already saving up through an employer-sponsored retirement plan, and you’re not sure if the payout will outlast you. You can start putting aside as little as $700 every month in an investment account. If you earn just 7% interest yearly and save up for 30 years, you’d have built up a little nest egg worth over $850,000.
Say you started this investment plan at 45 years, you get a significant income bump at 75 and ensure you can meet any unexpected expense. You also ensure that you have enough after tax to last for an extra 10+ years.
If you’re worried about running out of money in retirement and none of the options above seem viable for you, you can schedule a one-on-one consultation with a retirement planning specialist via this link. The call is free of charge or obligation, and you don’t have to commit to anything during or after this call.