Will You Outlive Your Assets?
by Kevin Murphy, United Investment Services, LPL Financial Advisor
Many Americans do not realize that one of the greatest risks to their financial security in retirement may be outliving their money. According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living to age 85 and a 45% chance of living to age 90.1 This suggests that many of us will need to plan carefully to ensure that we don't outlast our assets.
The first step in tackling longevity risk is to figure out how much you can realistically afford to withdraw each year from your personal savings and investments. You can tap the expertise of a qualified financial professional to assist you with this task or you can use an online calculator to help you estimate how long your money might last.
One strategy to help make your money last is to withdraw a conservative 4% to 5% of your principal each year. However, your annual withdrawal amount will depend on a number of factors, including the overall amount of your retirement pot, your estimated length of retirement, annual market conditions and inflation rate, and your financial goals. For example, do you wish to spend down all of your assets or pass along part of your wealth to family or a charity?
Tips to ConsiderNo matter what your goals, there are ways to potentially make the most out of your nest egg. Here are a few suggestions.
- Start a cash reserves fund. You'll likely need ready access to a cash reserve to help pay for daily expenditures. A common rule of thumb is to keep at least 12 months of living expenses in an interest-bearing savings account, though your needs may vary. Then, consider refilling your cash reserve bucket on an annual basis by selectively liquidating different longer-term investments, timing gains and losses to offset one another whenever possible.
- Be aware of interest rates. Responding to the current interest rate environment is one way to potentially squeeze more income from your savings and stretch out the money you've accumulated for retirement. For example, if rates are trending upward, you might consider keeping more money in short-term certificates of deposit (CDs).2 The opposite strategy may be employed when rates appear to be declining.
- Look into income-generating investments. Most retirees need their investments to generate income. Bonds and dividend-paying stocks may help fill this need. "Laddering" of bonds -- purchasing bonds with varying maturity dates at different times -- can potentially create a steady income stream while helping reduce long-term interest exposure. Dividend-paying stocks potentially offer the opportunity for supplemental income by paying part of their earnings to shareholders on a regular basis.4 Additionally, investing an equity-income mutual fund, which generally holds many dividend-paying stocks, may help reduce risk compared with investing in a handful of individual stocks. 5
1Source: Social Security Administration, Period Life Table, April 2012.
2Certificates of deposit (CDs) offer a guaranteed rate of return, guaranteed principal and interest, and are generally insured by the FDIC, but do not necessarily protect against the rising cost of living.
3Diversification does not ensure a profit or protect against a loss.
4Companies that offer dividend-paying stock cannot guarantee that they will always be able to pay or increase their dividend payments.
5Investing in mutual funds involves risk, including loss of principal.