How to Avoid Outliving Your Money

My (Laura) grandparents were your average blue-collar Americans.

My grandmother stayed at home raising a family while my grandfather worked outside the home. When he suddenly died just shy of age 63, my grandmother quickly had to learn how to live on her own.

As a widow, my grandmother almost entirely relied on my grandfather's Social Security check. Their biggest investment was the home where my grandmother lived for nearly 50 years.

She lived a simple life, but money was a constant worry. That was especially true toward the end of her life as she eventually needed to enter an assisted-living facility.

No one thought my grandfather would die at that age. No one anticipated the health issues that would plague my grandmother in her senior years.

My grandparents made the same mistake a lot of Americans make... not preparing for their financial future and unexpected hardships.

One of the many things I learned from my grandparents was the need to prepare for the unexpected, especially when it comes to retirement.

When thinking of retirement, most people have a goal of saving a specific lump sum... According to a survey from the Transamerica Center for Retirement Studies, most workers think they only need to save about $500,000 for retirement.

But that won't get you far...

Nowadays, it's not unusual to have a 20-year retirement. So $500,000 gives you about $25,000 a year.

That's not what I'd call a comfortable retirement.

Unfortunately, figuring out how much you need to retire is neither easy nor an exact science. And making your retirement goals and planning so simplistic could leave you without money when you need it most.

If you had a professional write you a detailed financial plan, here are just a handful of the factors they'd use to calculate how much you'd need in retirement...

  • The age you expect to retire
  • Your life expectancy
  • Expected return of capital on your investments
  • Estimated inflation over the remainder of your life
  • Possible interest-rate changes
  • The lifestyle you want to have in retirement
  • How much of your current income you'll need in retirement

People often think their cost of living will decrease significantly in retirement, but that's not true.

Inflation is one of the factors that eats away at your nest egg. My dad likes to tell me that he could get a can of Coke for about 10 cents as a kid. The stores around my office sell cans for up to $1.

Just think about how the rising cost of goods erodes your buying power.

Let's say you've decided you only need $25,000 a year to live comfortably when you retire in 30 years... That's $500,000 in today's dollars.

If we adjust for 3% inflation (the average annual rate since 1913), you'll actually need more than $1.2 million if you plan to retire in 30 years. And even if you do manage to save up that much, it still might not be enough.

Some expenses might decrease, like childcare, education, and your mortgage, assuming you pay it off before retirement. But other expenses like health care and end-of-life care will make up for a good portion of those expenses.

And you want to be able to enjoy your retirement, not simply survive it.

That's why a good place to start is to assume you'll need about 85% of your current income in retirement. So if you and your spouse make $120,000 a year, expect to need about $102,000 annually.

Again, that's just a good baseline. You can hire a financial planner to get into more detail, but there are a lot of free calculators online to help you figure out how much you need to retire. One of my favorites is Merrill Edge's Retirement Calculator.

Of course, knowing how much you'll need in retirement is only part of the battle. You also need to have a strategy that builds your nest egg and gives you the money you need for a comfortable retirement. And the sooner you can start, the better.

If you're an investor, look for opportunities that can pay you regular income – like dividend stocks, master limited partnerships (MLPs), real estate investment trusts (REITs), utility companies, preferred shares, corporate bonds, and municipal bonds.

And, as we've said before, make sure you're maxing out your contributions to 401(k)s, IRAs, and Health Savings Accounts.

A good plan now will help you have a worry-free retirement.

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Here's to our health, wealth, and a great retirement,

Laura Bente, CFP® with Dr. David Eifrig
October 15, 2020