One of the top concerns for most pre-retirees is not knowing how long their money will last them in retirement, along with the additional concern of managing unexpected expenses and emergencies. (1) Luckily, you don’t have to start retirement and simply “hope for the best.”
There are a variety of strategies to help you make your money last longer in retirement. We describe 3 of the most common strategies below. Of course, the strategies you use should be unique to your circumstances and resources, so it’s best to partner with a financial advisor who can review your situation and help you implement the strategies that are right for you.
1. Limit Withdrawals To Income
One attractive strategy is to only withdraw the income your investments are earning. When you only withdraw dividends and interest each year, the principal in your account remains intact, invested, and free to keep earning money. However, there are drawbacks to this method.
For this method to be feasible, you must have a very large principal balance that can earn enough dividends and interest to provide income for an entire year. Additionally, because you can never accurately predict how the markets are going to perform, income may fluctuate dramatically from year to year. Still, this method is worth considering if your portfolio can handle it.
2. Use The 4% Rule
Another popular method is to follow the 4% Rule, which was developed by William Bengen in the early 1990s and is based on historical market return data spanning 5 decades, from 1926 to 1976. (2) Bengen concluded that annual withdrawals from a retirement portfolio of 4% (adjusted each year for inflation) would safely sustain a 30-year retirement.
Many people adhere to this rule to guide their withdrawal decisions. But it’s important to remember that each individual’s circumstances are different. For some families, a 2% to 3% withdrawal rate may be more prudent. For others who worked until they were much older or for those with chronic health conditions, higher withdrawal percentages might be feasible. As always, a financial advisor can help you determine the withdrawal rate that’s best for you.
3. Create An Expense Floor
Some retirees prefer to balance the risk of volatile markets with fixed-income products, such as annuities, pensions, and whole life insurance with a cash value component. Much like Social Security benefits, these types of products are guaranteed to provide cash payments of the same amounts each month.
For retirees highly averse to risk, this strategy involves building up enough sources of these types of guaranteed income to cover the most basic of monthly expenses. Some products even offer add-ons that will adjust payments upward for inflation each year. This strategy can provide confidence to know that no matter how the markets behave, the most necessary monthly expenses will be taken care of.
Use The Right Combination Of Strategies For Your Situation
It’s likely that throughout your retirement, you’ll need to rely on a combination of several strategies that optimize your resources and account for other considerations unique to your situation, such as your life expectancy and goals for retirement. The strategies in this document are by no means comprehensive, but they are a good starting point to begin thinking about how you will make your money last.
At T.A. Holland & Co., our goal is to help you design and achieve the retirement you want, which is different from anyone else’s. We get to know you on a personal level to ensure the strategies you use are truly right for you. To see if we’re a good fit, reach out to us at firstname.lastname@example.org or 617-523-5656 to schedule a complimentary appointment so we can get to know each other. In the meantime, we also invite you to download our free eBook, Retire Happy.
About T.A. Holland & Co.
T.A. Holland & Co. was founded in Boston, Massachusetts, in 1920 and serves individuals and businesses throughout the country with their financial needs. We provide cutting-edge financial services with a broad array of solutions to help our clients grow and preserve their wealth. We have seen good and bad economic times. Throughout it all, T.A. Holland & Co. has thrived by always making the customer our number-one priority. We get to know you and understand your needs so we can provide you with the proper guidance and strategies. Our senior vice president, John Hellmuth, has been at the helm of T.A. Holland’s financial services since 1990, but he doesn’t do this job alone. He is joined by his two children, Lindsay Hellmuth and Thomas Hellmuth. As CERTIFIED FINANCIAL PLANNER™ practitioners, our financial services team has the knowledge and experience to help you solve your most pressing financial challenges. To learn more about how we can help you, visit our website and reach out to us to schedule a complimentary get-acquainted meeting.