We’re living longer. In the 1900s, only 4 percent of the population lived to see 65, according to American Demographics. In the 1930s, the average life expectancy for Americans for the first time reached 50 to 60 years.
But today, a 65-year-old man has a 50 percent chance of living to 85 and a 25 percent chance of living to 92, according to the Society of Actuaries. For women, the projected lifespan is even longer. That’s more time to go island hopping, hone your sailing skills, and track down the perfect Bordeaux.
But that longer lifespan also presents a financial challenge. Retire at 65, and you may well be drawing on your assets for 30 years or more.
So how can you make sure that you have enough? Here are five ways to consider in making your portfolio last as long as you need it to:
1. Set a Target
First, determine how much you’ll really need in retirement. Many financial advisors will say you’ll need 70 percent of your current budget. But be realistic. Some 94 percent of Americans would like to live at the same level of comfort in retirement as they did during their working lives, according to a survey by U.S. Trust.
Once you’ve come up with an annual retirement budget, determine how much of that money will be covered by annuities, Social Security, and other streams of income. Here’s how other affluent investors plan to finance their retirements, according to the U.S. Trust survey:
- Personal savings and investments: 29%
- Corporate pension: 17%
- Self-established retirement plans: 15%
- 401(k) plans: 13%
- Sale of business: 8%
- Sale of real estate: 7%
- Social security: 5%
- Anticipated inheritance: 4%
- Other sources: 2%
Once you’ve determined how much of your retirement budget needs to be covered by your assets, divide that number by .04. The result: the size of the portfolio you’ll need to generate your retirement income.
Set a target
|A.||Ann’s annual retirement budget||$140,000|
|B.||Amount covered by Social Security, an annuity and other income streams||$40,000|
|C.||Remainder that must be covered by Ann’s portfolio (A – B)||$100,000|
|D.||A sustainable withdrawal rate||.04|
|E.||Portfolio required (C ¸ D)||$2.5 million|
2. Keep a Large Cash Reserve
The biggest factor in the success of your retirement investing will be your ability to withstand volatility in your portfolio. There’s nothing worse than dipping into your stock portfolio when the market is down 30 percent. Even a bond portfolio has capital fluctuations.
To avoid cutting into your principal significantly during a market downturn, keep a cash reserve large enough to cover three to four years of your expenses. Your financial advisor can run the numbers for you and come up with a reserve amount that makes sense for your unique situation.
3. Use a Sustainable Withdrawal Rate (see: You must review your retirement distribution)
What percentage of your portfolio could you withdraw each year and still rest assured that your assets will last as long as you need them?
The answer: 4 percent. Given any portfolio and any market conditions, if you never withdraw more than 4 percent from your portfolio, you should never run out of money (which is why we divided your retirement budget by 4 percent to get your portfolio target).
A study by three Trinity University professors suggests that–not surprisingly–the longer your withdrawal period, the smaller your withdrawal rate should be. Later in your retirement, as your withdrawal period shortens to less than 15 years, you may be able to withdraw up to 8 percent or even 9 percent of your portfolio each year.
What withdrawal rate is sustainable for you? We recommend that you review your situation with a financial advisor every year or so to determine a reasonable withdrawal rate.
4. Invest Your Age
One of the biggest issues to consider in funding a 30-year retirement is inflation. If inflation increases at an average of 3 percent a year, the amount you pay for goods and services could double every 24 years. Your income needs to keep pace.
The invest-your-age formula can help you address that issue. This approach keeps more of your money in stocks longer than, say, your grandparents did in their retirement. Stocks have historically delivered a higher return than other alternatives, but at a higher level of risk, which makes them more appropriate for longer-term investing. Your grandparents probably got out of stocks the day they retired. But statistically, their retirement lasted a fraction of the time that yours will.
To invest your age:
- Take your age minus 10 as a percentage of your portfolio.
- Put that amount into bonds and cash.
- Invest the rest in stocks.
So when you’re 60, you’ll want to have 50 percent of your assets in cash and bonds and the rest in a mix of equities stocks. At age 95, you’ll still want to have 15 percent of your assets in stocks.
This material is for information purposes only. Individual circumstances will vary. Please see your investment professional prior to investing. Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss.
5. Remember, It’s about More than Money
Once you’ve developed your plan and are on the right track toward a financially independent retirement, shift the focus from your retirement income to your retirement dreams. What are you going to do in retirement?
Whether it’s serving on the board of your favorite charity, learning another language, or spending more time with your grandchildren, don’t wait until you turn 65 to get started. By getting involved in these activities early in life, you’ll be making a different kind of investment in your future.
As you plan for a longer lifespan, it’s always helpful to work with a financial advisor. An advisor can help you develop a plan and keep you on track to finance what may well be your 30-year retirement.