Planning for retirement savings to last until you are 80, 90 or 100 is a daunting job. But these basic rules can help you figure it out.
The good part about being alive today is that we’re living longer. The bad part — we’re living longer.
Not all that long ago a worker retired at age 60, or 65, lived a few more years and expired. Life expectancy for women and men in 1970 was just short of 71 years, for example, so retirement funds did not have to see most people to age 90 or 100.
Today, those of us approaching retirement are playing a very new game. Given the uncertainty about longevity and difficulty of projecting needs, we put together a few simple ways to know when it’s really OK to stop working.
Here are nine basic rules of thumb to help with your retirement planning:
1. Hold off taking Social Security — until 70 if you can
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Will Social Security be your primary source of income in retirement? If the answer is “yes,” carefully think through any plans to take your benefits when you become 62.
Maybe you have no choice, if you are too seriously ill to keep working. Or maybe you believe that you’re unlikely to live decades longer, In these cases, it may make sense to claim Social Security benefits early. Also, if you’ve got plenty of money from other sources, claiming early may be part of a larger strategy to maximize benefits.
But do think it through. If your parents lived a long time and you are likely to, too, starting Social Security early when the payment is smallest means you could be scrimping for a very long time. In August 2016, the average retired worker received a Social Security check of $1,350 a month, according to the Social Security Administration. Someone who is 65 today can expect to live for 20 more years, on average and so, except for very small cost-of-living increases, your monthly paycheck won’t change for 20 or 30 years.
Here is a concrete example: Suppose you are 56 today and earning $42,000 a year. If you begin claiming Social Security:
- At age 62, according to this Social Security calculator, your monthly checks will be about $950 for life, with small adjustments for inflation.
- At 67, if that is your full retirement age, your monthly paycheck from Social Security grows to $1,421 — a nice difference.
- At 70 you’ll enjoy a reward. For every year beyond your Social Security full retirement age that you delay accepting benefits, your monthly payment grows by 8 percent per year, which translates to a monthly check of $1,810.
- After 70, there’s no more point in waiting. (Social Security explains more about how this works.)
2. Compare fixed expenses to Social Security
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Here’s a simple way to ensure you’ll have the minimum you need to live in retirement:
- Tally your expenses. Add up your fixed monthly costs — the nut you have to cover each month, including rent or mortgage, heat, utilities, food and transportation. This tells you, roughly, the minimum amount of money you’ll need to get by. (Bear in mind, though, that costs will rise, so allowing for a little padding is a good idea.)
- Figure your minimum income. Use the Social Security calculator to learn what you’ll receive each month from Social Security, again, depending on the age at which you start collecting benefits.
If your monthly retirement income stream from Social Security and other guaranteed sources like a fixed pension covers your fixed expenses, you’ll know you’ve got the basics covered, even if you have no other sources of income. If not — or if you aren’t sure — cut expenses or keep working until you’ve reached the level of income you need.
3. Use savings for the optional stuff
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Once you know your basics will be covered by your guaranteed income, you can plan to cover variable — and more-optional — spending from savings and any windfalls — an insurance settlement, for example, or the sale of a business or an inheritance.
Things like buying theater tickets, boats and gifts for the grandchildren, eating at restaurants and traveling, should come out of this non-fixed income, making sure all the while to cover basic expenses with your guaranteed income. Be prepared to cut back your optional spending if your variable income dips,
4. Plan to cover income gaps
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You may find there’s a gap between the money you’ll need and what you’ll have, even if you can keep working. Get creative. What other sources of retirement income can you identify? You might, for example, rent out a room in your home. Or cut your expenses — which is even better than increasing income because it won’t increase your taxes.
5. Let your savings grow
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Stashing retirement savings in a savings or money market account does avoid the risks of the stock market. But it invites risk from another source: inflation. While your costs keep growing, your money does not. For example, inflation since 2001 to the present hasn’t been high but, over those 15 years, prices have risen an average of 36 percent. At least some of your money should be earning money — in the stock market or real estate investments, for instance. Otherwise it is losing value.
Unsure of how to divvy up your investments into stocks and bonds? One evergreen formula is to subtract your age from 100 and put the result into stocks. If you’re 50, for example, put 50 percent of your savings into a stock market index fund (these are cheaper than managed funds and produce results that are as good or better). Split the remaining 50 percent among bonds and cash equivalents. If you’re 65, put 35 percent into stocks and split the remainder among bonds and cash.
There’s a strong argument, however, that since we are living longer these days, this formula is too conservative and you should put even more of your savings into stocks since you’ll need to generate income for another 20 or 30 years from it.
Check out “11 Tips for Safe, Sane Investing in the Stock Market” for more ideas on growing your money.
6. Invest in a target-date fund
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One approach to funding retirement is to invest your savings in a target date fund, a fund that recalculates your investment mix based on your age to deliver a certain goal in a specified time period. (Read “6 Tips for Picking the Best Target Date Fund“).
Not all of these funds are equally good (learn about target fund downsides in “Is This the Best Way to Invest Retirement Savings?”), so do your research before you invest. One criticism of target funds is their relatively high fees. But you may not need professional help: By emulating one of the better funds on your own you can cut your fees in half.
7. Move someplace cheaper
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One strategy: If you live in an expensive locale you’re in luck, sort of. You can move to a less-expensive place to live for less.
Wondering where? Generally speaking, away from the coasts and out of the center of costly cities, or — if you’re more adventuresome — explore retirement possibilities in Mexico, Panama, Costa Rica and other less expensive countries.
8. Don’t bank too much on retirement calculators
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Retirement calculators are fun (for some of us, anyway). They give a sense of control over a difficult problem as you play with numbers and run “what if” scenarios.
But, as MoneyTalksNews founder Stacy Johnson points out, online calculators often are sales tools, used to lure readers into making a purchase. What’s more, they offer a false sense of security if you don’t see them as just one tool among many. Read “Why You’re Stressed About Your 401(k) — and How to Get Over It” for some basic rules on retirement investing.
9. Keep your eye on the ball
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Planning for retirement is not a set-it-and-forget-it kind of job. Keep running your calculations and planning ways to stretch your savings and cut your expenses in retirement.
A note: This is not to say that you should be constantly worrying about your rate of return on investments and trying to time the market. If you are an investments worrywart, find a cheap robo-advisor firm — Vanguard Advisors, for example, or Wealthfront, or Betterment. Some even offer human advisers to help with some of the decisions.
Here’s the surprise for many people: Retirement is not an event, only a transition. After your retirement date, you’ll still need to manage your money, generate income, calculate your expenses and keep an eye on cost-savings for many years to come.
For more ideas, read “19 Moves That Will Help You Retire Early and in Style“ and keep your eye on Money Talks News.
What’s your approach to retirement planning? Share thoughts and advice in the comments below or our Facebook page.