Chances are you will live longer than you think you will. That’s good news. You’ll likely have more time to enjoy your family, your friends, your pastimes, and your passions. Now you are expecting the bad news. There really isn’t any bad news, but there is some cautionary news. Misjudging how many years you have ahead of you could have a serious downside. You could run out of money. AARP.com points out that “in general, the older you become, the greater the likelihood that you'll reach your 90s. “[A]ssumptions about your longevity can be one of the biggest money mistakes you make, leading you to sock away too little each month in your 401(k) or to choose to retire before you're financially stable.”
“To get a fresh, relatively objective sense of your longevity, there are…tools available,” AARP.com says. “Search online for “life-expectancy calculator” and you can get an estimate from several organizations, each based on slightly different algorithms. Some require answers to only a few questions; others take a deep dive into your eating habits, medical history and other matters.”
No matter what your current age is or how long you think you will live, if you focus on maximizing the factors you can control, you can ensure that you do not outlive your money. You can create a retirement that is comfortable and financially secure.
Steps to Take Pre-retirement
One of the best investments you can make in yourself is to hire a financial advisor. Forbes magazine says “[f]inding a good financial advisor can help you avoid [bad decisions] and focus on goals. “Financial advisors aren’t just for rich people—working with an advisor is a great choice for anyone who wants to get their personal finances on track and set long-term objectives.” But if you don’t want to go the route of a paid advisor, there are lots of resources available on the internet to develop your own financial plan.
Nerdwallet.com suggests that you start by setting (and writing down) financial goals. “If you approach your financial planning from the standpoint of what your money can do for you — whether that's buying a house or helping you retire early — you'll make saving feel more intentional.”
Once you have set your goals, track your money and guide it toward your goals. NerdWallet.com recommends the 50/30/20 budget principles: “Put 50% of your take-home pay toward needs (housing, utilities, transportation and other recurring payments), 30% toward wants (dining out, clothing, entertainment) and 20% toward savings and debt repayment. Reducing credit card or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.”
Don’t let emergencies — like an unexpected car repair or a water heater that bites the dust — derail your plan. Start by setting aside some cash for emergencies. Many financial advisors will tell you that a good number to start with is about $500 and then over time grow that amount until you have enough to cover four to six months of expenses.
What to Do Post-retirement.
For most Americans, Social Security retirement benefits will not cover their cost-of-living. And the Social Security Trust Fund is facing a serious downturn in the not-to-distant future. Unless Congress acts to change the outcome, Social Security benefits may be cut by as much as 22%. So everyone should have an IRA or other savings to supplement their Social Security checks. Perhaps the most common mistake retirees make that threatens their financial well-being is drawing down those savings too quickly.
“Now retired financial advisor, William Bengen, came up with the so-called 4% rule almost two decades ago. It’s still in circulation,” reports the cable financial news network, CNBC. “It’s simple: You draw 4% from your savings in your first year of retirement, and then adjust that amount for inflation every year thereafter.” This is a good starting point, especially if you are your own financial planner, but it should be tailored to fit your own specific situation.
If you have investments, don't invest too conservatively. Your investment returns will need to outpace inflation and that generally means investing a larger portion of your money in stocks.
However, don’t be tempted by high-return, high risk investments. Kiplinger’ Personal Finance magazine offers this advice: “Warren Buffett's famous rules of investing are simple:
- Rule #1: Don't Lose Money
- Rule #2: Don't Forget Rule #1
That sage advice is even more critical in retirement. Key point: Losses are extremely hard to make up in retirement when you are also withdrawing from your portfolio for an income stream. Losses are more painful as well. There is a lot of truth in the story of the tortoise and the hare in retirement—slow and steady truly wins the race.”
