How can you ensure you'll have sufficient funds to last your entire retirement? So many of the variables used to calculate this amount seem uncertain. If you're concerned about running out of money during retirement, you need to be very conservative with your assumptions.
Some tips to consider include:
- Assume your retirement income needs to be at least 100% of your current income. Most rules of thumb indicate you'll need between 70% and 100%, but figure on at least 100% to be safe. Nowadays, retirees want to travel, pursue hobbies, and live an active lifestyle, which generally means you'll need more money.
- Add a few years to your life expectancy. You should probably plan on living until at least age 85 or 90. If your family has a history of longevity, add a few more years to these figures.
- Reduce your estimates of Social Security benefits. While Social Security is currently in sound financial condition, that is expected to change after all the baby boomers retire. To be safe, count on benefits that are somewhat less than estimates, and don't plan on adjustments for inflation.
- Cut back on living expenses now. This has a two-fold impact on your retirement. First, it frees up money to set aside for retirement. Second, you'll get used to a lower standard of living, which should also reduce your expected lifestyle for retirement.
- Reach retirement with no debt. Mortgage and consumer debt payments consume a significant portion of most people's income. Pay off all those debts and you'll significantly reduce your cost of living.
- Forget about early retirement. Saving enough to last from age 65 to age 85 or 90 is a difficult task. Trying to retire at age 55 or 60 is just not practical for most individuals, unless you are willing to significantly reduce your lifestyle. Working a few more years can go a long way in helping to fund your retirement.
- Consider working during retirement. Especially during the early years of retirement, you should consider working at least on a part-time basis.
- Plan on taking conservative withdrawals from your retirement assets. Don't plan on taking out more than 3% to 4% of your balance annually. Your funds should last for decades with that level of withdrawal.