Did you know that only approximately 58 percent of baby boomers have a retirement account? While most Americans have some type of savings account, almost 56 percent of Americans have trouble affording a sudden $1,000 expense.
Savings in general, let alone retirement savings, are becoming harder for the average person to scrape together. The pandemic, inflation, and interest hikes have also raised the cost of living, making our money slip through our fingers faster and faster.
So, the question now is when it comes to retirement savings, how do we not outlive our money? Forbes Contributor Jack Guttentag address the fear around this question.
Retirement Savings and Withdrawals
There are many ways to save for retirement. One aspect we always need to consider is how much we plan on spending. The rate at which we can save is directly affected by our suspected cost of living. This is a unique amount for every retiree as every retiree won’t have the same cost of living.
Also, there are certain rules pertaining to withdrawing from retirement accounts, for example, if you withdraw from a ROTH IRA or a 401(k) too early, you can be subject to taxes.
Guttentag brings up the 4 percent rule as the traditional rule-of-thumb for figuring out how much you should withdraw from a savings account. This suggests that you should withdraw up to 4 percent of your retirement savings or investment portfolio every year, accounting for inflation after the first year.
- Year 1: (Investment Portfolio) X 0.04 percent
- Year 2: (Year 1’s withdrawal amount) X (rate of inflation)
The problem with the 4 percent rule is that it’s too generic and doesn’t incorporate other forms of retirement income like benefits or pensions. This rule, as Guttentag states, would work better if the retirees that it put at risk of outliving their money were alerted to their risk and were able to adjust.
The basic principle of the 4 percent rule might be beneficial, but for retirees with a less diversified portfolio, it might be better to start at 1 or 2 percent.
How to Save
It is easier to save when you have steady streams of income. Retirement, especially in the last 20 years, has changed shape. Retirees are more tech savvy than before and are living longer too. With the need for more money, it becomes important for retirees to reevaluate their retirement plans and potentially consider a half-retirement.
Seniors and retirees that take on a half-retirement still work and earn a wage or salary but take more control over their own work schedule. There are significant benefits to a half-retirement, including:
- Having access to an employer sponsored 401(k)
- Having steady income
- Potentially earning a higher benefit due to a higher earning history
There are so many options available to seniors now, there is no one way to save. Talk with a financial advisor, and work to understand how much you’ll need in retirement. Utilize different types of retirement accounts that offer different types of returns. At the very least, if you see yourself running out of retirement savings, then you can get ahead of it early.
For more retirement tips and tricks, follow the Council for Retirement Security.