Whether it’s close or far away, the end of our employed working years is a time that holds a special place in our imagination. It’s a new phase with new beginnings and new challenges. Spending time with family and friends. Traveling. Volunteering. Learning new hobbies or interests. Relaxing. Worrying about money.
Wait — worrying about money? Yes. Studies show that 77% of Americans are anxious about their financial future, and 68% are worried that they won’t have enough to retire or that their money will run out. Even those who participate in retirement planning are concerned they’re not doing enough.
How long will your retirement savings last? Of course, you have no idea how long you’ll live, so it may seem that there’s no way to know without complicated math. The good news is that financial experts have developed a simpler way to see how long your retirement savings can last. There’s still some math involved, but it’s much easier to calculate.
In the 1990s, William Bengen issued a research study that indicated that an annual 4% portfolio withdrawal rate would sustain a retirement nest egg for 30 years, assuming half was invested in stocks and half in bonds.
This 4% conclusion has become a rule of thumb for many retirees, but will it work for you? Today many experts caution that retiring when the market is at a peak could give you a false reality of the funds you have available. A drop in the market will decrease your available funds. That 4% would be lower than calculated when the market was higher, meaning you will need to adjust your cost of living if you want to keep the status quo.
Also, while the 4% rule suggests a way to stretch a pool of money to last over many years, what you receive depends on the size of the pool in the first place. Your cost of living covers your daily living expenses along with all of those dreams you’ll need to support, including commitments of time and money to help others. The 4% annual payments you receive from savings including retirement income from 401k plans, traditional and Roth IRAs, and pensions may not be enough for dreams and/or your usual expenses.
A financial advisor can take all factors into account and provide you with a much more accurate level of assumed withdrawals over the course of your non-working years. A 4% withdrawal rate may constrict your spending more than necessary, or encourage you to spend more than you safely can.
In addition to investment advice, a financial advisor can show you other strategies that can impact your retirement dreams.
Social Security: Knowing when and how to start taking Social Security can be quite complicated. You can start receiving benefits when you turn 62 at a discounted rate to your full retirement age (FRA), which right now is 67 if you were born in 1960 or later. Or you can wait to receive benefits as late as age 70 at a premium rate that increases your benefit by 8% each year. Note that benefit amounts are permanently reduced when started earlier.
People have many reasons for or against waiting to file depending on their life, health, employment and economic situations, and political beliefs. Talking over a strategy with your financial advisor is strongly encouraged to understand the right strategy for your retirement. Additionally, spouses who did not work or worked for minimum wages may be eligible to receive spousal benefits to enhance and supplement retirement income. Understanding when and how to take spouse benefits can also be simplified with help from an advisor.
Working longer: Staying on the job, even for just another year or two, or taking up something part-time, can help you in three ways:
Fiscally, emotionally and physically: any of these reasons are important, but when added together, they can have quite a powerful effect on how you handle and face your retirement. A financial advisor should take all of these into account.
While many financial advisors concentrate on the dollars and cents of your retirement, at Stonecrop Wealth Advisors, that’s only the start. What’s just as important is understanding your goals and what drives you so that you approach retirement with a sense of purpose that supports who you are.
We strive to reduce your anxiety about money and work to make it possible for you to benefit your family and community through your success. Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.
Additionally, we know that life has many other goals such as college, new homes, or debt elimination that need attention, too. We help to make sure you are prepared to walk through these life transitions and obstacles with confidence.
As a full-service financial and investment advisory firm that works with both families and non-profit institutions, we help you get to the root of the purpose behind your money and to connect the money to your purpose. Then we take your resources and put them on a path towards a more prosperous future.
If you would like to find out more about Stonecrop and our financial planning services:
Either way, we look forward to sharing more about how you can go beyond the 4% rule when retirement planning for your future.
AUTHOR
Doug MacGray
DATE
November 2, 2021
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