3/13/2014 3:15 PM ET|
Retired? How to avoid running out of money
When money goes out and doesn't come in, it's only natural to wonder if the cash will run out. Here's how to make sure it doesn't.
Life expectancies have been rising in modern times -- and this is a good thing for the most part. But retirement planning is one area where this could be cause for concern: You may worry about running out of money after you retire. Relax, there are ways to proactively deal with this fear.
Several academic studies address strategies for retirement planning. One recommends that you add more of a stock component to your portfolio after retirement, contrary to the conventional approach. Another suggests you could focus on saving steadily, rather than concentrating on how much money you should accumulate in order to withdraw at a certain rate from your savings each year in retirement. Yet another study involves a dynamic approach -- adjusting up or down the rate at which you should withdraw money from your portfolio every year in retirement.
Buying an annuity is a tried-and-tested approach that enables you to count on a regular payment for as long as you live. And, of course, adequately budgeting for spending is a practical exercise that will help you prepare for retirement.
Want to avoid running out of money in retirement? Read on to see what the academics and financial industry experts say.
Gradually hike up your stock exposure
Conventional wisdom states you should dial down your stock exposure as you advance in age. But an academic study turns that idea on its head: Rather than cutting down on stocks in your portfolio after retirement, you should hike it up.
According to Wade Pfau, professor of retirement income at the American College, and Michael Kitces, a partner with the Pinnacle Advisory Group in Columbia, Md., instead of going for a downward slope in terms of your equity exposure, you should actually go for a 'U'-shape approach, with the stock component of your portfolio gradually going up post-retirement.
This way, when market returns are not good in the early years of retirement, you will add more stock exposure to your portfolio and can benefit later in your retirement after the market rebounds. And in case the market returns are good early on, the higher stock exposure in your portfolio means that you are ahead of the game and prepared for the later stages of retirement.
Pfau says, "Starting with a lower stock allocation and then gradually increasing it helps to provide bigger downside protection. In the worst-case scenario, the damage toward retirement is going to be less than created with other asset allocation strategies."
Focus on saving steadily
Those still in the workforce can avoid running out of money in retirement by saving steadily throughout their careers.
In another study by Pfau, he found that you are likely to be better off by focusing on saving at a steady rate during your working years, rather than on a withdrawal rate after retirement. The conventional approach is to try to accumulate a certain target wealth amount that will help you withdraw at a specific safe and sustainable withdrawal rate -- say, 4 percent -- from your portfolio in retirement.
Pfau says, considering that a portfolio of stocks and bonds tends to be volatile, it means you can't safely say where you will end up. "Instead, look at savings rate, which, because of its mean reversion, tends to be much less volatile in terms of what consistently works historically," says Pfau.
There is no universal savings rate that applies to everyone, and you can figure out what works for yourself. However, a baseline of 16 to 17 percent might be a good starting point, Pfau finds.
Another disadvantage with focusing on a safe withdrawal rate is that this rate, if it is set during a time when portfolios are benefiting from a long bull market, is not likely to be sustainable.
Periodically adjust your withdrawal rate
Once you set up a certain withdrawal rate, the conventional retirement approach is to stick to it throughout retirement, over a period of time that could be as long as 35 years.
David Blanchett, head of retirement research with Morningstar, the Chicago investment research firm, says, "The two unknown variables when it comes to building an income strategy are how long you are going to live, and what the market returns are. If you knew both of these variables with absolute certainty, you could know exactly the amount you could take from your portfolio."
He says that retirees would be better off readjusting their withdrawal rate periodically in a dynamic manner, rather than sticking to a specific withdrawal rate.
The way to do this is to reassess your withdrawal rate at some defined interval, typically once a year, based on factors such as how long you expect to live, your current spending and plans for future spending.
These three triggers should motivate you to reassess your withdrawal rate: if the market drops, if you change the allocation in your portfolio, or if you have a life event that changes your expectations on retirement.
Set upper and lower limits for withdrawals
Mutual fund giant Vanguard's dynamic approach to portfolio withdrawals is based on a combination of two tactics: a) starting off with a specific dollar-amount withdrawal and adjusting it for inflation each year, and b) withdrawing a specific percentage of your portfolio annually.
In what Vanguard calls a "ceiling and floor" approach, the fund company says you could withdraw a specific percentage of your portfolio each year, setting upper limits, or a ceiling, and lower limits, or a floor, based on what you spent in the previous year.
If you find that your defined withdrawal would result in an amount that's, say, higher than a ceiling of 5 percent more than your prior year's withdrawal, then you would withdraw only up to the ceiling amount. Similarly, if you find that the defined withdrawal amount falls below a minimum floor you set, then you would withdraw at least the floor amount.
For example, you withdrew $30,000 from your portfolio in 2013 and find that your 2014 withdrawal would be $30,300 based on a 1 percent rate of inflation. Instead of going with this defined withdrawal, you would instead, based on a 2.5 percent floor, withdraw $30,750, hiking up the 2013 withdrawal by 2.5 percent.
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While I firmly believe it is the individual's responsibility to develop a nest egg, I also believe there is room for government intervention, but in the complete opposite direction of how Capital Hill does things today. How about instead of re-distributing the wealth of contributors, they put the squeeze on non-contributors.
One of the biggest problems in this country is that 10's of millions of households pay nothing for a government that provides them with all sorts of services (benefits, homeland security, national defense, natural resources, a legislature, a judiciary, etc.; the list is endless).
The result is a bigger burden falls on us, the paying workers, which impedes our ability to save something for retirement, which forces working past 65 or retiring on a reduced standard-of-living.
Assume 35 million households provide ZERO $$ to this country in the form of taxes (forget SS taxes)
If we implement a $5.00 per day citizens/residency tax ($1825 per year) the government would bring in another $63+ billion per year (365 * $5 * 35 million). If the average household has to pay thousands and thousands in taxes each year, asking the non-contributors to pay $1825 per year is not asking much. If you want to be part of the American Dream then BUCK UP as I am tired of footing the bill for others at the expense of my retirement fund.
There are 8 levels of control that must be obtained before you are able to create a socialist state. The first is the most important.
1) Healthcare – Control healthcare and you control the people
2) Poverty – Increase the Poverty level as high as possible, poor people are easier to control and will not fight back if you are providing everything for them to live.
3) Debt – Increase the debt to an unsustainable level. That way you are able to increase taxes, and this will produce more poverty.
4) Gun Control – Remove the ability to defend themselves from the Government. That way you are able to create a police state.
5) Welfare – Take control of every aspect of their lives (Food, Housing, and Income)
6) Education – Take control of what people read and listen to – take control of what children learn in school.
7) Religion – Remove the belief in the God from the Government and schools.
8) Class Warfare – Divide the people into the wealthy and the poor. This will cause more discontent and it will be easier to (Tax) the wealthy with the support of the poor.
Any of this sound familiar?
P.S. to 1 min. ago.
Do away with WELFARE fraud and there'll
be enough for retirees who worked for
40-50 years and deserve to live well
in their down time.
I am just not comfortable with annuities, but I am ingnorant on them.... It seems I am giving my money to someone else to invest and keep a portion of it, so they can pay me small amounts over time, while they make money and keep it.... They have to be making money somewhere??? If I can invest it my self and control my spending, what is the benefit of annuities
Please let me know your thought on annuities....
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