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The risk of longevity is in the heart Retirement planning. By counting on savings to get you through the rest of your life, you undermine work and income. But with careful saving and money management, it may be possible to make this money last. For example, say you recently reached retirement age of 68 and have $950,000 in a pre-tax traditional IRA. Longevity risk, social security, accounting, RMDs And they can help you plan more precisely.
The risk of longevity is the possibility of outliving your retirement savings.
It is not uncommon to estimate how long a family will live and therefore how much money they will need. This is, in part, because population averages are misleading. According to the CDCThe average life expectancy for all Americans is 79.3 years for a woman and 73.5 for a man. However, the average life expectancy for those 70 and older may be between 80 and 90. According to SSA.
This significantly changes the calculation for retirement savings. So if you plan to retire Full retirement age At 67, a typical family should expect at least 20 to 25 years of retirement, with savings to support their lives during that time.
Using the example of a 68-year-old with $950,000 in an IRA, how can you make sure this portfolio lasts? To a significant degree, it depends on managing your income.
Know yours first Social security benefits. This income is guaranteed for life, so you can rely on it to complement your retirement portfolio.
For example, the average retiree receives $1,860 a month in Social Security benefits; As of January 2024, according to SSA data. This amounts to $22,320 per year for life, and will continue to grow in the future with federal annual cost-of-living adjustments (COLAs).
For many families, a large percentage of income comes from IRA, 401(k), 403(b) or other retirement portfolio earnings. It was a popular starting point over the years 4% rulePlan to invest modestly and withdraw 4% of your portfolio annually for 20+ years in retirement. With a $950,000 IRA, this income would generate $38,000 per year. Combined with Social Security, that comes out to a total of $60,320 a year, although you may need to increase that again due to inflation.
To address longevity risk, consider balancing your portfolio with income assets. These are assets, such as bonds, stocks, and savings accounts, that provide returns without selling the underlying asset. While all investments involve risk, successful income assets can provide an unlimited portfolio of income, albeit at a relatively low rate compared to their investment counterparts.
Annual contract They are potential income asset options for retirees. These are terms that can guarantee a fixed payment for life. For example, a $950,000 annuity policy purchased at age 68 could, in theory, generate $6,360 per month or $76,320 per year. According to the Schwab Income Calculator.
However, annuities and all other income assets expose your portfolio to inflation. Without significant growth, your portfolio will lose purchasing power over time.
To mitigate this risk, it is wise to balance your retirement portfolio with some stocks and other growth oriented assets. Typically, the way to do this is through mixed asset funds such as index funds or mutual funds. These portfolio-based assets can provide your. Retirement account Exposure to growth investments, reducing the risk associated with selecting equity separately.
If income is one half of managing long-term risk, spending is the other. First, check your tax situation.
before tax Traditional IRA or 401(k)You need to pay income tax on every money you make. That lowers your effective income and increases the tax on your Social Security benefits. You can mitigate this by rolling over your IRA to a Roth IRA, but this involves sacrificing a portion of the account for prior income taxes.
If you put money into a pre-tax IRA, don’t forget to estimate your required minimum distributions (RMDs). In our example, your $950,000 IRA is the only retirement account you have, so you’ll likely withdraw less than your annual RMD. Once you turn 73, just remember that this minimum exists, as the tax penalties for ignoring it can be severe.
Also, consider the lifestyle you want. When it comes to making a retirement account permanent, the most important thing is how much you spend. Some key issues include:
Do you own or rent a home?
Do you live in an expensive or cheap city?
Can you comfortably move to extend your savings?
What luxuries and hobbies do you enjoy?
Do you have special medical needs?
What types of regular accounts do you maintain?
Already have long-term care and supplemental health insurance?
What kind of estate plans do you have?
All these factors will determine your needs and flexibility during retirement. For example, someone living in a small town might find a $950,000 IRA more than enough for simple portfolio growth. On the other hand, a person living in an expensive city needs to invest to earn high returns to afford the standard of living. A Financial advisor It can help you determine the appropriate strategy for your needs and goals.
To make sure your savings will last you the rest of your life, look at your spending levels and your projected portfolio income. If this sounds like something that could comfortably last into the ’90s, you’ve probably struck the right balance. If not, plan for the associated risks of investing in additional growth or look for areas where you can cut costs.
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool It matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to determine which one you feel is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
As a retiree, don’t forget that investing is important even in retirement. After all, you may have 25 to 30 years to enjoy returns from your portfolio. Look The SmartAsset Retirement Investment Guide To know more.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to high volatility, like the stock market. The trade-off is because 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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