Money not only helps us do the things we want to do in life, but it allows us to maintain a certain quality of life that affects our everyday actions. It’s no surprise then that when asked about their number one fear financially, most people say that they fear running out of money more than anything else. This fear heightens when it comes to the period of your life when you no longer have steady income: retirement. Running out of money in retirement is a legitimate concern, but it is one that you can protect yourself from by making smart decisions.
Protect yourself from running out of money in retirement with these seven strategies.
- Use tax-advantaged retirement accounts. Take advantage of any retirement accounts available to you that are tax advantaged, including the traditional IRA, 401(k), Roth IRA and/or Roth 401(k). The traditional IRA and 401(k) allow you to contribute tax free up front, but then you will pay taxes on your withdrawals in retirement. Conversely, contributions to a Roth IRA or Roth 401(k) are taxed, but then that money will grow tax-free, and you won’t pay for retirement withdrawals. It’s a good idea to have both types of these retirement accounts in your savings arsenal. The growth your money is subject to experience can protect you from running out of money in retirement.
- Decide how much you with withdraw annually. A longstanding “rule” of retirement has suggested taking 4 percent out of your savings annually to live off of during retirement. Depending on how much you have saved, you may need to adjust that number to take out less, or to take out more. How much you withdraw annually can also depend on factors like the stock market’s performance that year and inflation.
- Don’t forget inflation. Speaking of inflation, in order to protect yourself from running out of money in retirement, you should always account for inflation in your saving and spending projections. Over time, inflation has averaged about 3 percent annually. That means if something costs $100 now, at a 3 percent inflation rate, it could cost $181 in 20 years. Keep inflation in mind as you determine your retirement savings goals and the amount of your annual withdrawals.
- Prepare to account for healthcare costs. Protect yourself from running out of money in retirement by being aware of how much healthcare will cost you as you grow older. According to Fidelity, a 65-year-old couple can expect to spend about $260,000 on healthcare in retirement. Of course, that number could be higher or lower depending on your individual ailments, how long you live, etc. The point is, don’t let yourself be blindsided by what could potentially be exorbitant healthcare costs.
- Use the Rule of 100. As you grow older, you should adjust your asset allocation according to your risk tolerance. Think about it—when you are 55, you do not have as much time to recover from a serious stock market downturn as you did when you were 35. At Ty J. Young Inc., we suggest following the Rule of 100. The rule states that you should have at least the percentage of your retirement savings equal to your age in low- to no-risk investments. For example, if you are 55, then at least 55 percent of your assets should be protected from stock market volatility. Being smart about risk as you grow closer to retirement can shield you from running out of money during that phase of your life.
- Collect Social Security strategically. Social Security will probably not be able to fully support you in retirement, but it can certainly help. One way to maximize the amount you receive in Social Security benefits as a retiree is to delay taking your benefits. For each year you delay taking benefits up until age 72, you will increase the amount of your benefit by about 8 percent. Therefore, if you can afford to delay, it might be a good idea to do so. You can also coordinate strategically with your spouse regarding Social Security. For example, you may opt to start taking benefits of the lower-earning spouse sooner rather than later and save the benefits of the higher-earning spouse until later in retirement when you may depend on it more.
- Purchase an annuity. Certain types of annuities offer you 100 percent protection against stock market losses as well as the ability to set yourself up to receive guaranteed income payments in retirement. The fixed index annuity is one that gives you a physical guarantee in hand that your money is protected. It also offers historical annual rates of return between 6 and 8 percent. Not only can this type of annuity give you the peace of mind that you will not run out of money, but it also gives your money the opportunity to grow as the stock market does.
There’s nothing wrong with worrying about running out of money in retirement, so long as you take action to make sure that it doesn’t happen. At Ty J. Young Inc., our qualified financial advisors help our clients every day to invest their money in such a way that it is protected and growing. To learn more, give us a call at 877-912-1919!