Written by 
Edited by 
Retirement means living on your savings, assets and structured benefits, but it takes planning to make your savings last. The right plan can give you a comfortable, reliable income in retirement, but it requires balancing risk, growth and spending. It’s never too late – or too soon – to make a plan or improve the one you already have.
Consider consulting a financial advisor for help developing the right retirement plan for a comfortable retirement in the future.
Step 1: Longevity and Inflation
It’s hard to plan for retirement because no one knows exactly how long they’re going to live. Therefore, it is impossible to estimate an exact figure of how much money you will need for retirement.
Estimate too high, and you might force yourself into an unnecessarily tight budget, skipping out on little pleasures and luxuries in order to stretch your dollar farther. Estimate too low, and you may embrace an unsustainably loose budget, running the risk of exhausting your savings and living out your remaining years on Social Security alone.
When planning income for the rest of your life, it is critical that you assess your longevity risk. Since life expectancy is outside your knowledge or control, there are two ways to address this issue.
1. Estimate Conservatively
You could assume an unrealistically long life span and budget for it. Ideally, this approach ensures that you’ll die with money in the bank. However, it may also ensure that you are destined to live on an unnecessarily tight budget in your retirement.
Generally, a good rule of thumb is to plan on your savings lasting until around age 100. The average retiree lives to 65 if a man and 63 if a woman, but since this is the average, it means that around half of retirees will outlive this estimate.
Although speculative, it is generally assumed that the younger you are, the more likely it is that medical care will extend both your health and your life. Moreover, people over the age of 100 aren’t that rare, and their numbers are projected to skyrocket in the near future.
Therefore, planning to live until at least 100 is generally a reasonable, conservative decision. While this approach may restrict you to a reduced standard of living, it will also mitigate the risk of outliving your savings. If that happens, you’re likely better off sacrificing luxuries in your 70s rather than risking running out of money in your 90s.
2. Plan for an Income-Based Portfolio
With this approach, you would structure your investments around yield- and income-generating assets, such as annuities and bonds. Both annuities and bonds generate payments without requiring the sale of underlying assets.
The advantage of an income approach is longevity. Because you don’t sell the underlying assets, you can theoretically live off an income portfolio indefinitely, although it is important to note that bonds turn over periodically.
The biggest disadvantage of an income approach is its inability to account for growth. Income-based assets tend to have much lower returns than comparable investments in capital gains-based assets. Your portfolio will be relatively secure and predictable, but this comes at the price of reduced overall income.
A financial advisor can help you determine which method is most ideal for your individual situation.
Don’t Forget About Inflation
However, in all cases, longevity risk is closely tied to inflation.
Prices generally increase annually for the same basket of goods and services. If you maintain a fixed income, this will steadily reduce the spending power of your savings. At the Federal Reserve’s target 2% inflation rate, prices will generally double (and your spending power will fall by half) every 30 to 35 years.
Regardless of how you structure your retirement savings, it is important to plan for this inflationary trend. This generally means you should plan to grow your overall income by around 2% each year, whether through increased portfolio withdrawals or from other assets.
Otherwise, your standard of living may steadily erode.
Step 2: Review Your Income
Next, review your income. By now, you will likely have retirement income from Social Security benefits and your retirement portfolio.
As an example, assume that you currently receive the average Social Security benefit of $1,976 per month, or $23,712 per year. This is your base inflation-adjusted income.
From there, your income will be based on how you manage your $800,000 portfolio. One option is to use the 4% rule, which assumes that you withdraw 4% of your portfolio annually over the next 25 years of retirement, with inflation-adjusted withdrawals offsetting your portfolio’s gains. With an $800,000 portfolio, this would generate $32,000 of income for the next 25 years.
While the 4% rule is a good place to start, many consider it unrealistically conservative. Your actual income will depend entirely on how you choose to manage your money.
For example, say that you choose to invest entirely in AAA corporate bonds. At a 5.46% corporate bond yield, you would generate around $43,680 per year in interest payments alone, assuming you invested entirely in those assets.
Added to your Social Security income, you would now have $67,392 per year in combined, indefinite income.
You could also invest in an annuity as a security-oriented approach. A lifetime annuity is a contract that guarantees fixed monthly payments for the rest of your life in exchange for an upfront investment.
Say you invest all $800,000 of your savings in an annuity plan, with the contract generating $5,687 per month, or $68,244 per year, for the rest of your life. With your benefits, this would be about $91,956 per year in combined indefinite income. However, annuities are generally not adjusted for inflation unless you pay extra upfront.
Alternatively, you could invest for capital gains. For example, say that you invest in a mixed-asset portfolio generating an average of 8% annually. You could withdraw about $69,391 per year from this portfolio for 25 years. With Social Security benefits, this would amount to approximately $93,103 in annual income.
However, this portfolio would risk exposure to market volatility, so it is important to plan for down years. Still, the value of your investments would be more likely to rise in step with inflation, giving you a hedge against rising prices.
Consider speaking with a financial advisor to further explore how these numbers break down for your own retirement plan.
Step 3: Weigh Spending and Taxes
Your spending is the area where you have the most control.
To ensure your savings last for the rest of your life, it is important to confirm that your income will cover all of your current and foreseeable needs.
While you can change your financial plan to pursue more growth, that always comes at the cost of greater risk and higher volatility. If your income isn’t sustainable by age 69, you should probably prioritize a review of your spending.
Consider sitting down with a financial advisor to make a budget, so you can see how much you spend and need on a monthly basis. These are a few areas to consider.
Housing
How much do you spend each month on housing?
If you rent your home, consider not only your current rent but also future increases. If you own your home, consider the many costs involved, including the current and future costs of insurance, maintenance and taxes.
General Spending
How much do you spend each month on the general cost of living? This includes expenses like food, clothing, bills and utilities, as well as the other aspects of day-to-day life.
Be sure to carefully assess your own spending, as it’s easy to miss the nickels and dimes of daily life that can so quickly add up.
Insurance and Medical Costs
How much do you spend on gap insurance, long-term care insurance and medical costs?
The older you get, the more these costs will likely grow, so be sure to account for your medical needs, both now and in the future.
Entertainment, Leisure and Travel
How much do you spend on non-necessities? This can range from simple luxuries, such as going out to dinner or seeing a movie, to bigger ticket items like travel and luxury vacations.
It’s important to enjoy your retirement, but be mindful of this potential lifestyle creep.
Taxes
How much do you pay in taxes? Unless you hold a Roth account, you must pay income taxes on your savings income and possibly Social Security benefits.
Be sure to account for after-tax income when you make your budget.
Strategies to Help Your Nest Egg Grow in Retirement
Growing your retirement savings doesn’t stop once you leave the workforce. Even after you retire, your money needs to keep working to offset inflation, healthcare costs and a longer lifespan.
Keeping a portion of your portfolio invested in assets offering potential future growth, such as stocks, mutual funds or exchange-traded funds (ETFs), can help your nest egg maintain its purchasing power. The key is finding the right balance between growth potential and the stability needed for regular income.
One common strategy is to divide your assets between different investment types based on your time horizon and risk tolerance.
Retirees often use a mix of stocks for growth, bonds for income and stability and cash for short-term needs. This approach, known as diversification, helps reduce the risk that one market downturn could significantly impact your overall savings. Regularly reviewing and rebalancing your portfolio keeps it aligned with your goals as markets change.
You can also stretch your savings by being strategic about how and when you withdraw funds. For example, drawing from taxable accounts first while allowing tax-deferred accounts, such as 401(k)s and IRAs, to continue growing can help you better manage taxes over time.
Systematic withdrawals are another option, allowing for annual withdrawals based on a set percentage rather than fixed dollar amounts. This can help your savings last longer while your portfolio adjusts more naturally to fluctuating market conditions.
You can also protect and grow your nest egg by managing expenses and reinvesting part of your income. Continuing to reinvest dividends, delaying large purchases and even working part-time for a few years can all help reduce pressure on your investments.
Reviewing your plan with a financial professional can help you find new opportunities for tax savings or growth potential as your needs evolve in retirement.
Finding Your Answer
So, how can you make sure your savings last for the rest of your life?
The answer is to ensure that your reliable income exceeds your foreseeable spending needs.
Take our annuity estimate above. If you put all of your savings into a representative annuity, you could generate about $91,956 of inflation-exposed income annually. If you can build a plan to hedge against inflation and this income is exceeds your current spending needs, you can carry on with confidence.
But in the event that’s not the case, it’s time to adjust your spending. Cut out expensive luxuries, review your daily spending and, if necessary, move somewhere with more affordable housing. If your needs exceed your savings at this point in life, the odds are that you can best respond by reducing your spending.
Regardless, you can breathe easy because you have built a solid nest egg. With some good planning, you’ll be fine.
Bottom Line
When you are near or in retirement, your savings are largely in place. To ensure that you build a sustainable retirement, begin by reviewing your financial strategy and then compare it against your your budget. At this point in life, your spending is the area you’ll have the most control over so it is crucial that you plan accordingly.
Tips on Budgeting in Retirement
- Making a monthly budget isn’t always easy. Sure, you’re aware of the big-ticket items like your rent and utilities, but what about the little things? The daily spending that’s easy to forget about, but that adds up quick? In retirement, it’s more important than ever to keep an eye on that. Here are some tips on how to do so.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Photo credit: ©iStock.com/agrobacter