Americans are living longer than ever before, with an average lifespan that, according to U.S. government figures, has increased from 73.7 years in 1980 to 78.3 in 2010 and a projected 79.5 by 2020. While that means more time to enjoy life, it also presents a dilemma: How are we going to make sure our money lasts a lifetime so we can keep living the lifestyle to which we’re accustomed, whether we live until 70, 80, 90 or more?
It’s a question that requires pondering, whether your retirement is already upon you, looming in the not-too-distant future or still decades away. Essentially, said June Schroeder, CFP®, with Liberty Financial Services in Elm Grove, Wis., it comes down to basic math: How much will you have saved come retirement, and how long will that nest egg last, based on how much you spend, what your income is, and how long you expect to live? “Then you’ll see if your portfolio will provide you enough income for life.”
Sounds straightforward enough, right? Not exactly. Embedded in that seemingly simple equation are a lot of unknowns, from the performance of your investments to your health and more. Still, there are simple steps to take now to address those uncertainties and give yourself the best chance of not outliving your nest egg:
• Find a financial ally. Considering the many complexities that go into developing a complete picture of a person’s finances and their income needs during retirement, and the fact that some key assumptions in the retirement income model have changed recently, it makes sense to consult a CERTIFIED FINANCIAL PLANNER professional to help crunch the numbers and develop an accurate, actionable plan for building a nest egg to last throughout retirement. To find a financial planner in your area, visit the FPA’s national database at www.FPAnet.org/PlannerSearch/PlannerSearch.aspx.
• Manage your cash flow. Cash flow is the foundation for determining a person’s retirement income needs. That means developing a solid, detailed picture of what you’re taking in, what you’re spending, and what your expenses are. Before retirement, this picture will reveal how much you can afford to put toward your retirement nest egg. During retirement, it will reveal how long your money will last. Here’s another area where the input of a financial planner is invaluable.
One way to stretch your retirement dollars is to cut back on spending. The less you spend during retirement, the slower you’ll drain the nest egg. And prior to retirement, the less you spend, the more you can put away for later, notes Schroeder. A financial planner can help identify places to cut spending.
• Protect your asset base. Given the time, effort and commitment it takes to build a solid nest egg using a 401(k), IRA, pension and other assets you’ll be relying upon to yield retirement income, Schroeder recommends taking steps to protect those assets from the risk of a market downturn (what if, with retirement just around the corner, a stock market nosedive takes a major bite out of your nest egg?) as well as other risks such as higher inflation and an unexpected health crisis. Taking a safer approach to one’s investment portfolio as retirement nears makes sense, said Schroeder, and in some cases, so does investing in inflation-protected securities — investment instruments that include features designed to protect investment value if inflation increases. Meanwhile, buying long-term care insurance protects a nest egg from the risk of a potentially draining healthcare crisis. If you are hesitant to purchase a standalone long term care policy, consider combination plans such as life insurance with access to the death benefit while alive to pay for long term care services. Several of these combination plans may be easier to qualify for when compared to traditional LTC policies.
• With retirement looming or already here, consider income-producing investments such as dividend-paying stocks.
• Assess your tax situation. Having a tax strategy is key to stretching retirement income, said Schroeder. When to start taking Social Security income? How to handle requirement minimum distributions from retirement account? Will taking more out of my IRA push me into another bracket or should I tap other sources? These are just a couple of the many issues to consider in maximizing your tax efficiency. The potential complexity of these issues makes it a good idea to consult a tax expert.
• Kick the tires on a guaranteed-income vehicle. Annuities are insurance contracts, some of which include features that provide contract-holders with a guaranteed income stream for life, or for a certain period of time during retirement. Fees, market risk and moving parts often accompany these annuity products, so consult a financial planner before investing in one.
• Live healthily! The healthier you are, the less you’ll spend on healthcare. Depending on your age, you can use those savings to stretch or strengthen a retirement nest egg.
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