I'm 69 With $800k in Savings. How Do I Make Sure This Money Lasts the Rest of My Life?
1 day ago
Spending is the area you'll have the most control over in retirement.
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It takes planning to make your savings last.
Retirement means living on your savings, assets and structured benefits. Many households find this notion stressful, but it doesn't have to be. The right plan can give you a comfortable, reliable income in retirement. But that plan will require balancing risk, growth and spending, and you don't want to figure this out on the fly.
As they say, the best time to build a plane is before takeoff.
However, it's never too late (just like it's never too soon) to make a plan or improve the one you have. For example, let’s say that you're 69 years old with $800,000 in savings. This is a good nest egg, and you've clearly done well at saving for retirement.
Now, how can you structure this portfolio to make sure it lasts for the rest of your life? Here's what to consider. And if you want some help along the way, consider reaching out to a financial advisor.
The place to start is with the end of your question. How should you plan for "the rest of your life?"
This is an issue known as "longevity risk." Basically, it's hard to plan for retirement because you don't know how long you're going to live, so you can't know how much money you’ll need. Estimate too high, and you might force yourself into an unnecessarily tight budget, skipping out on joy and luxuries in order to make your money last longer than you'll need it to. Estimate too low, and you might embrace an unsustainably loose budget, running the risk of exhausting your savings and living out the rest of your life on Social Security alone.
Managing longevity risk means addressing this unknown. How much longer should you reasonably expect to live? And how should you structure your income around that question? Since life expectancy is outside your knowledge or control, there are two ways to address this issue.
You could assume an unrealistically long life span and budget for it. Ideally, this approach effectively ensures that you’ll die with money in the bank. However, it also might ensure that you’ll live on an unnecessarily tight budget in your retirement.
Generally, a good rule of thumb is to assume you’ll need savings until around age 100. The average retiree might live to around age 87. Since this is the average, it means that around half of retirees will outlive this estimate. And, while speculative, the younger you are, the more realistic it is that medicine will extend both your health and your life. Moreover, people over the age of 100 aren’t that rare, and their numbers are projected to skyrocket in the near future. So, planning to live until at least 100 is generally a good, conservative decision.
While this approach may restrict you to a reduced standard of living, it will also hedge against the risk that you outlive your savings. And, if it comes to that, you're better off missing out on luxuries in your 70s than running out of money in your 90s.
With this approach, you would structure your investments around yield- and income-generating assets like annuities and bonds. Annuities and bonds generate payments without the need to sell the underlying assets.
The advantage to an income approach is longevity. Since you don't sell the underlying assets, you can theoretically live off an income portfolio indefinitely. (Although bonds will turn over periodically.) The biggest disadvantage to an income approach is growth. Income-based assets tend to have much lower returns than comparable investments in capital gains-based assets. Your portfolio will be relatively secure and predictable, but that will come at the price of reduced overall income.
A financial advisor can help you determine which method might be most ideal for your individual situation.
However, in all cases, longevity risk goes hand in hand with inflation.
Each year, prices generally increase for the same basket of goods and services. If you maintain a fixed income, this will steadily reduce the spending power of your savings. At the Federal Reserve's target 2% inflation rate, prices will generally double (and your spending power will fall by half) every 30 to 35 years.
No matter how you structure your retirement savings, you need to plan for this inflationary trend. Typically this means you should plan to grow your overall income by around 2% each year, whether by increasing your portfolio withdrawals or having some other source of assets. Otherwise, your standard of living may steadily erode.
With this in mind, you would next review your income.
Here, you likely have retirement income from Social Security benefits and your retirement portfolio. We’ll assume that you currently receive the average monthly Social Security benefit of $1,976, or $23,712 per year. This is your base, inflation-adjusted income.
From there, your income will be based on how you manage your $800,000 portfolio. One good place to start is with the 4% rule. This approach assumes that you withdraw 4% of your portfolio each year in retirement over the next 25 years, with inflation-adjusted withdrawals offsetting your portfolio's gains. With an $800,000 portfolio, this would generate $32,000 of income for the next 25 years.
While the 4% rule is a good place to start, it’s generally considered unrealistically conservative. Your actual income will depend entirely on how you choose to manage your money. For example, say that you choose to invest entirely in Aaa corporate bonds. At a corporate bond yield of 5.46%, if you invested entirely in those assets, you would generate around $43,680 per year in interest payments alone.
With your Social Security income, this would be $67,392 per year in combined, indefinite income.
You could also invest in an annuity. This, again, would be a security-oriented approach. A lifetime annuity is a contract that guarantees you fixed, monthly payments for the rest of your life in exchange for an up-front investment.
Say you invest all $800,000 of your savings in an annuity plan. A representative contract might generate $5,687 per month or $68,244 per year for the rest of your life. With your benefits, this would be about $91,956 per year in combined, indefinite income. However, annuities are generally not adjusted for inflation unless you pay extra up front.
Alternatively, you could invest for capital gains. For example, say that you invest in a mixed-asset portfolio that generates an average of 8% per year. You could withdraw about $69,391 per year from this portfolio for 25 years. With Social Security benefits, this would be about $93,103 per year in income. This portfolio would be exposed to market volatility, so you would need to plan for down years. However, the value of your investments would be more likely to rise in step with inflation, giving you a hedge against rising prices.
Consider speaking with a financial advisor if you’re interested in exploring how the numbers break down for your own retirement plan.
This is the area that you have the most control over.
In order to make sure that your savings last for the rest of your life, you’ll need to make sure that your income covers all of your current and foreseeable needs. While you can change your financial plan to pursue more growth, that always comes at the tradeoff of more risk and volatility. By age 69, realistically, if your income isn't sustainable, you should probably start by reviewing your spending.
Consider sitting down with a financial advisor to make a budget, so you can see how much you spend and need on a monthly basis. A few major areas to consider include:
How much do you spend each month on housing? If you rent your home, consider not just your current rent, but future increases, as well. If you own your home, consider current and future costs of insurance, maintenance and taxes.
How much do you spend each month on the general cost of living? This includes expenses like food, clothing, bills and utilities, and the other aspects of day-to-day life. Make sure to look carefully at your own spending; it's easy to miss the nickels and dimes of daily life.
How much do you spend on gap insurance, long term care insurance and medical costs? The older you get, the more this category will grow, so make sure to account for medical needs both now and in the future.
How much do you spend on non-necessities? This can range from simple luxuries like going out for dinner or seeing a movie, to bigger ticket items like travel and luxury vacations. It's important to enjoy your retirement, but make sure to keep an eye on this kind of lifestyle creep.
How much do you pay in taxes? Unless you hold a Roth account, you’ll need to pay income taxes on your savings income and possibly Social Security benefits. Make sure to account for after-tax income when you make your budget.
This is how you’ll arrive at the answer to our question: How can you make sure your savings last for the rest of your life? By making sure that your reliable income exceeds your foreseeable spending needs.
For example, take our annuity estimate above. If you put all of your savings into a representative annuity, you could generate about $91,956 of inflation-exposed income each year. If you can build a plan to hedge against inflation, and if this income is greater than your current spending needs, then you can carry on with confidence. If not, it's time to adjust your spending. Cut out expensive luxuries, review your daily spending and, if necessary, move somewhere with more affordable housing.
If your needs exceed your savings, at this point in life, the odds are that you can best respond by reducing your spending.
But breathe easy. This is a solid nest egg. And with some good planning, you'll be fine.
When you are near or in retirement, your savings are largely in place. To make sure that you build a sustainable retirement, you should start by reviewing your financial strategy, then look carefully at your budget. At this point in life, your spending is the area you’ll have the most control over.
Making a monthly budget isn’t always easy. Sure, you're aware of the big-ticket items like your rent and utilities, but what about the little things? The daily spending that's easy to forget about, but that adds up quick? In retirement, it's more important than ever to keep an eye on that. Here are some tips on how to do so.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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