11/9/2010 6:30 PM ET|
Make your money last in retirement
People are living longer and saving less, leaving many in a financial bind in their later years. Here are some ways you can stretch your retirement dollars.
If you're like many people, you've put considerable time and effort into socking away money for retirement. But you've probably put less thought into how to spend the money in a way that will make it last, leaving you with a potential disaster.
A perfect storm has foisted this challenge on us. People are living longer. Fewer people have pensions and the 401k plans that more have come to rely on likely were decimated n the recent downturn. Further, assets in savings accounts may actually be losing value, thanks to short-term interest rates that are lower than the inflation rate. And the future of Social Security seems iffy.
There are steps you can take to make your money last. Spending less and working longer will help, of course. But even then you can't know how long you're going to live. All you have are the odds: For a married couple at age 65, there's a 58% chance one person will live to 90; a 50% chance one will live to 92; and a 25% chance one will live to 97.
William Wixon, the owner of Wixon Advisors, tells his Minnesota clients to plan for a retirement of 30 to 35 years. How can they make their money last that long, or longer? Let's say you're 65 years old, you want to retire now, and you expect to need $100,000 annual income in retirement. You'll need to adjust that $100,000 to rise with inflation because, as Wixon says, "What's a loaf of bread going to cost in 30 years? Maybe nine bucks." Here are some options for you, with pros and cons.
If you have a Depression-era mentality, put your nest egg in savings accounts and certificates of deposit with no more than the FDIC-insured limit of $250,000 in any one bank. It's safe and will be there for you no matter what the markets do.
Unfortunately, inflation may erode the value of such low-risk investments over time after inflation, and they are unlikely to generate much income. If you have a pot of money for getting you through your golden years, the most you should withdraw annually over a 30-year period is 5% (some people say 4%). With current savings interest rates of around 2%, you would need to start with $5 million to generate $100,000 a year in income. And that doesn't even account for inflation pressures on your annual withdrawal, as the buying power of your $100,000 decreases.
A balanced portfolio
If you don't happen to have $5 million lying around, you'll need to accept more risk to have any chance of generating that $100,000 a year you desire. One alternative is to put money in a diversified portfolio of stocks, bonds and real estate that pays dividends. If you start with $3 million and the market performs as it has over the past 70 years, you should be in good shape. But if the market lags or companies cut their dividends, your money might not last.
A recent white paper from Vanguard Group discusses making systematic, fixed, inflation-adjusted withdrawals from a balanced mutual fund of stocks and bonds. Adjusting your withdrawals based on the inflation rate might reduce the risk that you'll run out of money, but it won't eliminate it entirely.
With an immediate annuity, you put money in an insurance contract that usually pays a fixed rate of return (much like a certificate of deposit) and start receiving those payments within a year. How much income your lump sum will generate depends largely on how much you invest, your gender and age at the time you buy the annuity, and the prevailing interest rate environment (currently unfavorable to annuity buyers). A 65-year-old woman living in Illinois would need to plunk down about $1.5 million to generate $100,000 in inflation-adjusted annual payments for life.
It pays to comparison-shop for immediate annuities, especially among low-cost vendors like Vanguard and TIAA-CREF. Also consider tailoring the annuity to your needs --by arranging for payments to continue until both spouses pass away, for example.
One downside is that an immediate annuity ties up your money, so you won't have access to it in an emergency or to pass on as an inheritance if you get hit by a bus the day after you buy it. It also locks you into the interest-rate environment at the time of purchase. You can get around this by buying separate annuities in chunks over several years. To lock in real, after-inflation income, opt for an inflation-adjustment rider, but understand that it will cut into how much you'll receive each month.
With a deferred annuity, you pay now and hope to accumulate assets through either a variable product that invests in equity mutual funds or a fixed product that offers bond-like returns. How much you'll receive each month when you start to draw down your annuity will then depend on how your variable or fixed investments do over time.
Putting aside money this way may encourage you to save for retirement. But it may also come at the cost of hefty surrender fees or penalties if you decide you need to tap your savings prematurely.
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$100,000???? Who are you talking about?? You're way off the mark, unless this article was for the top 10% of the retirees!!!
take ssi as soon as you become eligible because its more actual money in your pocket, it wont equal out paymentswise til you hit 78 besides money today in your pocket is always worth more than money next year. in the years to come and with the QE-2 (Quantative Easing 2) where we buy our own debt because china wont buy any more T-bonds the american dollar will be out in new and improved 2 ply form
If you're like many people, you've put considerable time and effort into socking away money into a retirement acctount. But you've probably put less thought into how to spend the money in a way that will make it last, leaving you with a potential disaster.
If you don't happen to have $5 million lying around, you'll need to accept more risk to have any chance of generating that $100,000 a year you desire
Ok then..............first we are to be avoiding certain doom and a retirement of a street person. Next we have 5 million dollars that we are stupid enough to attempt to gain 100k per year leaving the original 5 mill for the US government to take 35+% of .....................................
WHILE ALSO BEING SO STUPID THAT WE CAN'T USE A CALCULATOR TO SEE THAT 5 MIL WITH "0" INTEREST AT ALL SPREAD OVER THOSE SUPPOSED 30 YEARS IS ALREADY
166,666.66 PER YEAR............TAX FREE...........AND THAT IS WITHOUT ANY SOCIAL SECURITY!
FROM THAT "EXTRA" 80K OR SO (INCLUDING THE AT LEAST 14K FROM S/S) WE COULD DOLE OUT 13K PER YEAR (TAX FREE) TO 6 OF OUR CHILDREN TO HELP DEPLETE THE ESTATE!
As a direct product of the Great Depression, and still maintaining that mentality of frugality, I have saved all of my working life and following a strict regimen of conservative savings, all of my savings are now in CDs. When the financials realized just how much money is in the senior citizen's control they went on a direct assault of that reserve by reducing, through collusion, their interest payouts of our monies in their facilities. The results have been disastrous for those of us who have followed this regimen with savings payouts at 0.05% and CDs now at an all time low averaging less than 0.1%! After being forced to retire, by cancer, at 62, my reserves were split 50/50 between stocks and bank savings and at 80 I bailed out of the markets and converted everything to CDs which were paying enough for us to be comfortable. Not rich by any measure but comfortable until now! Now at 85 I/we are just 1 catastrophic illness away from being penniless! Doesn’t seem hardly worth all of the effort, does it?
I find it interesting that as of this post I have received 7 "thumbs up" and 11 "thumbs down". Everything I have stated is 100% correct and can be verified. I have put no one down. No negativity on any company. As far as New York Life is concerned go to Guaranteesmatter.com, it is spelled out right there.
Check out the ratings and who has the best at StandardandPoors.com,Fitchs.com, moodys.com, and ambest.com. Nope, didn't say anything wrong there. All true.... Could it be some of those who disagree are Stock companies or are they the same people who would put an older aged Senior into a equity indexed annuity for the sake of a comission and not what's truly suitable and the best interest of the client?
Retirement?! LMFAO!! Who the hell, gen x or later is actually going to retire? Please...
I've been told since I was in junior high that SS was bankrupt and to not count on it (although, we can feel free to go ahead and pay into anyway!) The 401K is just a tool the corporations are using to increase their own profits. They know we will never retire on these funds. Face it, retirement in America is once again a myth. Unless there are some serious changes and corporations start offering pensions again (yeah, right) it's going to remain a myth.
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