Will I Have Enough Money When I Retire?

People work long and hard to save for retirement, and it can be challenging to estimate how much is enough money in savings to cover your costs throughout retirement, while making your money last as long as you do. This is only exacerbated with increasing life expectancies, since retirement savings need to last longer.

A common rule of thumb for retirement spending is the 4% rule, which suggests retirees can withdraw 4% of their savings during the first year of retirement, then adjust that amount for inflation each subsequent year and never run out of money. Of course, it also means that if there is deflation, one would spend less during that year. The 4% rule assumes a portfolio of 60% equities and 40% fixed income assets and 30+ years in retirement.

However, various factors like fluctuating market returns, unplanned expenses, health issues, and longevity, to name a few, test the straightforward 4% rule. We believe that the best way to determine how to spend your hard-earned nest egg is to evaluate the following areas:

Life Goals: Brainstorming about your life goals (both financial and “bucket list”) will help frame how much your needs, wants and wishes might cost over your lifetime. Some examples are:
  • Travel
  • Part-time Work
  • Volunteering
  • New Cars
  • Second Home
  • Downsizing
  • Charitable Giving
Legacy Goals: You may have people in your life to whom you would like to leave money or property.

Risk Mitigation:  Sometimes, the unexpected happens, and it is important to consider how to protect yourself and your assets. Categories include:

  • Longevity Risk: As you live longer, your retirement income must stretch out over a longer period of time.
  • Health Risk: Since Medicare does not cover Assisted Living or Nursing Home care, you may need to set aside funds or purchase long-term care insurance.
  • Ancillary risks: Political climate impacting Social Security, Medicare, etc.
One quick way to evaluate if you have enough to last your lifetime is to take the present value of your future costs to see if it matches what you have. We call this determining “fundedness.” This results in being overfunded, constrained, or underfunded. The problem with this calculation is that there are varied answers to many of the assumptions needed just to determine what the costs are (numerator) and how much money after taxes you will have (denominator) Some of those assumptions are:

  • How long will I live?
  • Do I have expenses that will go away at some point?
  • When should I begin collecting Social Security?
  • How do I sign up for Medicare?
  • Do I need life or long-term care insurance and how much?
  • Which pension option should I choose?
  • How much do I gift during my lifetime to reduce/eliminate estate taxes?
  • Which account(s) do I start taking money from…IRAs or brokerage or Roth?
  • Are there tax mitigating strategies that are advantageous?
  • How much can I leave my kids and grandkids? 

Here at Rockland Trust, we help you fine tune those answers through thoughtful conversations, applying many years of experience and knowledge, as well as employing proven techniques and tools. Our dynamic approach responds to lifestyle changes, and our Financial Planning team is ready to provide projections on how to meet all of your life goals.

If you have approximately 30 years of life left and do not encounter any unexpected costs during those years, the 4% rule is an easy way each year to gauge if you are “on track” to have enough funds to last your lifetime. For example, if you started with $1 million, you would withdraw $40,000 from your portfolio in the first year. If you are now 3 years into retirement and inflation has been 5%, 2% and 1%, withdrawals from your portfolio would be $42,000, $42,840 and $43,268.40 in years two, three and four, respectively. If your portfolio now has $985,000, you are no longer taking 4%, but rather 4.06%, which is OK! The important point is to ensure that as you age, the percentage grows slowly and steadily with minor spikes for planned expenses. If you have legacy goals, one of those spikes is a big one at the end.

Coming full circle, spending strategies can be structured so that you optimize your guaranteed income: Social Security, part-time work, pensions, and/or rental income. There are also tax-saving strategies like Roth IRAs, life insurance solutions and proper estate planning techniques to evaluate. Please reach out to your Relationship Manager, if you would like to discuss engaging in a financial planning exercise, particularly if you are contemplating retiring soon.