With retirement planning there is close to an obsession with hitting a predetermined target number. The idea is to create a retirement portfolio that is so large that it will be able to fund all of your needs for the rest of your retirement years.
But there is a flip side to retirement planning that doesn’t get nearly as much attention, and that’s being able to preserve your retirement portfolio for the rest of your life. There are compelling reasons why this is at least as important as hitting a target portfolio size.
What the Retirement Experts Don’t Always Tell Us
I suppose that if experts were to tell us everything in regard to retirement planning, we might see how complicated it really is, and even consider abandoning the effort. There are two factors that will have a material effect on how long your retirement assets need to last.
1. We’re living longer.
This is often expressed as outliving your money, and it’s one of the biggest complications that comes with retirement. Planning for a retirement that will last for 10 or 15 years past the age of 65 is one thing. But planning for one that will cover 25 or 30 years is entirely something else. The average person who retires at age 65, will realistically have to be prepared to live on their retirement assets for 30 years. Whether that will happen or not something we can never know for sure, but we need to be prepared nonetheless.
2. Heavier reliance on fixed income investments.
One of the favorite assumptions of retirement planners is that you will faithfully earn 8% to 10% on your money by investing in the stock market. The problem is very few people will retire with 100% of their money invested in stocks.
Once you reach retirement age you’ll already have a substantial percentage of your portfolio invested in fixed income assets. This percentage will increase as you get older. The reality is that you will not be in a position to take a major loss on your stock portfolio and recover from it so late in life. This will require heavier reliance on fixed income assets.
If the return on the fixed income portion is only 3-4%, this will have a material effect on how long your retirement assets last. Based on today’s interest rates, you won’t even get that kind of return either.
Making Your Retirement Savings Last Longer
You’ll have to develop ways to make your retirement savings last longer, no matter how much money you have saved. The best way to do this will be to rely on your retirement savings as little as possible, especially in the early years of retirement.
You can do this by having other sources of income that you can rely on. By relying on these sources, either entirely or at least partially, you will avoid tapping your retirement savings too early or too heavily.
There are certain income sources you will be able to rely on or to begin to develop now that will avoid you having to rely entirely on retirement savings, including:
- Social Security or employer pensions
- Continued job or business income
- Passive income sources, such as rental real estate
- Non-retirement assets (to draw on instead of retirement savings)
- A business that you can sell to increase retirement savings
Any of these income sources will reduce your reliance on your retirement portfolio, either early in retirement, or even throughout it.
What Will These Income Sources Do for You?
1. Reduce the number of years you will withdraw from your plan.
The reason that you want to have income sources to rely on early in your retirement is so that you reduce the number of years that you need to dip into your retirement portfolio. For example, let’s say you rely on alternate income sources from age 65 to 70; right there you reduce withdrawals from your retirement portfolio from 30 years down to 25. That alone will make a major difference in how long your retirement portfolio will last.
2. Allow more time for your retirement savings to grow.
By not withdrawing funds from your retirement portfolio in the early years, you’re giving your portfolio more time to grow. If you have $500,000 in retirement savings, invested at 6% per year on average, and you delay taking withdrawals for five years, it will give your portfolio a chance to grow to $669,113. That is an increase of more than $169,000, just as a result of allowing your portfolio to grow without drawing it down. It’s also one of the best ways you can grow your retirement portfolio if you do not have a sufficient amount.
3. Gives time to make additional contributions.
If you can continue to earn income, you can continue making retirement plan contributions, at least up until age 70 ½. Even if your contributions are not toward an employer-sponsored plan, such as a 401(k), you can still make IRA contributions. Making the maximum contribution for five years will increase your retirement savings by $60,000, plus the earnings that accumulate on it. You can continue contributing to a Roth IRA even past age 70 ½.
When it comes to retirement savings, enough may not necessarily be enough. You’ll have to have strategies in place that will allow you make your portfolio last as long as is necessary to provide for the rest of your life.
What’s your retirement strategy? Leave a comment!