5 Ways to Avoid Outliving Your Retirement
Many Americans dream of the day they enter the retirement years of their years. If the retirement years are finally here for you, you’re going to want to make sure your money lasts the rest of your life. You can only estimate how many years you will live, and you will have to manage your finances so your savings will last for that unknown number of years. I found an article entitled, “5 Ways to Avoid Outliving Your Retirement” with some helpful ways to make sure you keep the money coming in, no matter how long you live:
Social Security – Social Security will be the first source of continued income you look to so you can avoid outliving your savings. Social Security payments will continue for the rest of your life and are adjusted for inflation each year. Anyone who qualifies for Social Security will never completely run out of money, but he or she may have to cut down the standard of living in order to survive on the Social Security payment if all other sources of income are exhausted.
Since this often times ends up being the only guaranteed source of income for most retirees, it is a good idea to try to increase the amount you will get. How do you boost your Social Security payments? First, you want to make sure you have at least 35 years of covered earnings; you claim spousal payments; and delay your claims up until age 70. “Get your [online] Social Security statement from the Social Security Administration and then go through that information and use it to decide when to claim Social Security,” advises Troy Von Haefen, a certified financial planner for Von Haefen Financial Management in Nashville.
A Pension – Those who are lucky enough to get a traditional pension through their work will generally have a second guaranteed source of monthly retirement income. Most private-sector pension plans are insured by the PBGC, which guarantees pension benefits up to certain annual limits and will pay out benefits even if your former employer goes out of business. However, workers who have traditional pensions are being offered lump-sum pension payouts more often than before. These pensions do not come with the same protections though. If you don’t manage a lump sum prudently or you end up living longer than you expected, you could end up spending that money too quickly.
An Annuity – Immediate annuities will allow you to hand over a chunk of your retirement savings to an insurance company in exchange for guaranteed monthly payments for the rest of your life. The costs and fees of some annuities can be high, and you generally won’t be able to pass the money you use to purchase an annuity on to heirs. However, you do gain a predictable monthly income, even if you live past age 100 or the stock market takes another dive, so long as the insurance company stays in business.
“With the insurance company annuity, the insurance company guarantees that the money will last the rest of your life no matter how long you live,” says Steve Vernon, a fellow of the Society of Actuaries and author of “Money for Life: Turn Your IRA and 401(k) into a Lifetime Retirement Paycheck.” “If you want that lifetime guarantee, you are going to have to trade off access to your money. With most annuities, once you give your money over to the insurance company, you can’t get it back other than the monthly paycheck.”
Systematic Withdrawals – If you are a disciplined investor, you may be able to gradually draw down your savings in such a way that it is likely to last as long as you live. Many financial advisers recommend that you withdraw no more than about a 3 or 4 percent of your retirement savings, perhaps adjusted for inflation, each year. This strategy does carry the risk that your investments could perform poorly, that you will live longer than expected, or that you will simply fail to stick to the plan and spend more than you should. However, that money will be available to you to use for emergencies, such medical bills or home repairs. And if you pass away sooner than expected, your heirs will get the money.
If you are an especially gifted investor, you’ll also get to keep your investment gains. “With a systematic withdrawal scheme, if you live a long time or have a poor investment experience, you might run out of money or you might pass away before you run out of money and have a lot of money left to leave to your heirs or charity,” says Vernon. “Looking forward, we may not have the interest rates to support the 4 percent rule. We’re moving toward 3.5 or 3 percent as a safer withdrawal rate.”
Pay off your house – Paying off your mortgage will eliminate one of the biggest monthly bills you have and will allow you to use your savings for other expenses other than housing. The equity in your home could also be used for extreme emergencies, such as taking out a second mortgage or reverse mortgage. “If you pay off your house, that’s a guaranteed return of 3 to 4 percent,” says Stephen Curley, a certified financial planner and director at Water Oak Advisors in Winter Park, Florida. “If you go into retirement debt-free and owning your house outright and you are able to take out 4 percent of your portfolio along with Social Security and meet your retirement needs, that is the best-case scenario. And if you can’t stand the capital market, you should maybe buy a fixed immediate annuity.”
There are few things more frustrating than not being able to enjoy retiring because you are worried about money. One way to avoid such concerns is to convert part of the value of your home into money you can spend. The best way to do that when you retire is to take out a reverse mortgage, which allows you to retain home ownership and does not require you to pay the borrowed money back on a set schedule, unlike a traditional mortgage. The best way to figure out how much you can borrow is with a reverse mortgage calculator. Then you can set up the terms by which you want to receive it. For example, you can opt for a large single payment to cover a major expense. You can also choose monthly payments to help you pay ongoing, predictable bills.