4 ways to outlive your retirement savings
CNBC.com
Ever wake up in cold sweat at night wondering whether you'll outlive your retirement savings? You're not alone.
Many Americans have spent too much and saved too little, and traditional defined-benefit pensions have gone the way of the fax machine, displaced by 401(k) plans with modest balances.
The median 401(k) plan balance for two-person households nearing retirement (age 55 to 64) is about $111,000, according to the Center for Retirement Research at Boston College. To some, that may seem like a big nest egg, but it equates to less than $400 per month during retirement, assuming a yearly withdrawal rate of 4 percent, adjusted for inflation.
Many Americans have spent too much and saved too little, and traditional defined-benefit pensions have gone the way of the fax machine, displaced by 401(k) plans with modest balances.
The median 401(k) plan balance for two-person households nearing retirement (age 55 to 64) is about $111,000, according to the Center for Retirement Research at Boston College. To some, that may seem like a big nest egg, but it equates to less than $400 per month during retirement, assuming a yearly withdrawal rate of 4 percent, adjusted for inflation.
To make matters worse, half of today's private-sector workers don't have any employer-sponsored retirement plan at their current jobs, according to the book "Falling Short: The Coming Retirement Crisis and What to Do About It," by Charles D. Ellis, Alicia H. Munnell and Andrew D. Eschtruth. Many of us will need more income during retirement than did previous generations, due to longer life expectancies and rising health-care costs.
"The fundamental problem," when it comes to retirement, "is that most people don't have much in the way of savings," said Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College. "The solution to not having enough is to have a boatload of money. The question is: How do you acquire a boatload of money?"
If you are off-track when it comes to retirement savings, the obvious solution is to begin stashing away a huge percentage of your income, Webb said. But many people in their 40s and 50s are unwilling or unable to make that kind of sacrifice, he added. So then what?
Here are some ideas to consider:
1. Delay retirement. Retirement-planning experts say it behooves us to resist the temptation to call it quits in our early 60s, provided we don't have very physically taxing jobs. Putting off retirement has several potential benefits. It means more time to save and invest and, for better or worse, a shorter life expectancy during retirement.
"The fundamental problem," when it comes to retirement, "is that most people don't have much in the way of savings," said Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College. "The solution to not having enough is to have a boatload of money. The question is: How do you acquire a boatload of money?"
If you are off-track when it comes to retirement savings, the obvious solution is to begin stashing away a huge percentage of your income, Webb said. But many people in their 40s and 50s are unwilling or unable to make that kind of sacrifice, he added. So then what?
Here are some ideas to consider:
1. Delay retirement. Retirement-planning experts say it behooves us to resist the temptation to call it quits in our early 60s, provided we don't have very physically taxing jobs. Putting off retirement has several potential benefits. It means more time to save and invest and, for better or worse, a shorter life expectancy during retirement.
"If you can work longer, for many people that will be a more palatable solution than saving a crazy percentage of your salary," Webb said.
Working longer also allows you to wait to claim Social Security retirement benefits.
Typically, the longer you wait to claim benefits, the bigger your monthly payments will be, up until age 70. Those who claim benefits at age 70 get a whopping 76 percent more per month than they would if they began drawing benefits at age 62, according to the book "Falling Short: The Coming Retirement Crisis and What to Do About It."
Many people draw Social Security benefits early, figuring they might not live long enough to make a higher monthly payout worth the wait. But that calculus can be problematic, because nobody knows exactly when they'll die, said David Mendels, a certified financial planner and director of planning at Creative Financial Concepts.
"You might die before your life expectancy, and if you do and you claimed early, you made the right call—and congratulations," he quipped. "But if you live longer than your life expectancy, you might end up eating cat food in your old age."
Working longer also allows you to wait to claim Social Security retirement benefits.
Typically, the longer you wait to claim benefits, the bigger your monthly payments will be, up until age 70. Those who claim benefits at age 70 get a whopping 76 percent more per month than they would if they began drawing benefits at age 62, according to the book "Falling Short: The Coming Retirement Crisis and What to Do About It."
Many people draw Social Security benefits early, figuring they might not live long enough to make a higher monthly payout worth the wait. But that calculus can be problematic, because nobody knows exactly when they'll die, said David Mendels, a certified financial planner and director of planning at Creative Financial Concepts.
"You might die before your life expectancy, and if you do and you claimed early, you made the right call—and congratulations," he quipped. "But if you live longer than your life expectancy, you might end up eating cat food in your old age."
"Remember that you aren't investing for just the next five years. You are also investing for 20 years from now."
Sellers of these annuities are essentially redistributing income from contract owners that die relatively young to those who live a long life, said Webb at the Center for Retirement Research. So why part with a chunk of money when you run the risk of falling into the first camp? The rationale, Webb said, is similar to the reason people buy homeowner's insurance: Your house may not burn down, but if it does, you'll be glad you had insurance.
4. Don't ignore inflation and interest-rate risks. One of the biggest dilemmas many older Americans face is how to invest their savings. Mendels at Creative Financial Concepts says it's important to keep in mind that all investments carry risk and that it's okay to take some stock-market risk to help counter the real possibility that inflation will erode your spending power during retirement. Many retirees, he said, wrongly focus exclusively on income-generating investments, which can be volatile, too.
"Retirees jump through these hoops in an effort to generate more income and get into riskier and narrower stuff when they should be focused on total return as opposed to yield," Mendels said.
It is important, he added, to have a long-term perspective and "remember that you aren't investing for just the next five years. You are also investing for 20 years from now."
—By Anna Robaton, special to CNBC.com
4. Don't ignore inflation and interest-rate risks. One of the biggest dilemmas many older Americans face is how to invest their savings. Mendels at Creative Financial Concepts says it's important to keep in mind that all investments carry risk and that it's okay to take some stock-market risk to help counter the real possibility that inflation will erode your spending power during retirement. Many retirees, he said, wrongly focus exclusively on income-generating investments, which can be volatile, too.
"Retirees jump through these hoops in an effort to generate more income and get into riskier and narrower stuff when they should be focused on total return as opposed to yield," Mendels said.
It is important, he added, to have a long-term perspective and "remember that you aren't investing for just the next five years. You are also investing for 20 years from now."
—By Anna Robaton, special to CNBC.com
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