Saving for retirement is challenging, no doubt. But if you want to know what's really tricky, consider spending that money in retirement.
Retirees in the past often relied on a simple rule for retirement income: Draw down 4% of your savings every year and you will be all set. But the retirement landscape has changed.
For one thing, people are living longer, and their money has to last all that time. One in four people who are 65 years old today will live to age 90, and one in 10 will live to 95.
Low interest rates also complicate the picture for savers. A one-year certificate of deposit came with a yield of just 0.28%, on average, through most of September, according to Bankrate. That's hardly enough to generate much retirement income.
"You need to have the safety in terms of predictable income, and you need to have part of your portfolio in risk assets. You could be looking at 30 years" of retirement, said Dan Keady, senior director of financial planning at TIAA-CREF.
"We talk about the 4% guideline as a starting point," said Judith Ward, a senior financial planner with T. Rowe Price.
Take longevity, for example. At T. Rowe Price, financial planners recommend that people planning for retirement assume that their money will have to last for 30 years, said Ward. Clearly, if retirement assets remain flat, a 4% drawdown will not last that long.
That's why Ward and others recommend that retirees use a 4% withdrawal rate as a loose target, but then adjust their drawdowns depending on market conditions. When markets are in a downturn, "great, tighten the belt," Ward said. Conversely, a strong market can enable retirees to draw down a bit more, since they will still be leaving plenty of savings in the portfolio.
"People need to every year come back and look what's going on," Ward said.
Another approach is to consider annuitizing some retirement savings. Annuities have gotten a bad rap at times for high fees and opaque terms, but as Americans live longer, more experts are pointing to them as tools to help your money last.
"An annuity is really like an additional pension for some people," said Keady, adding that it "adds some stability to where you are getting your income."
In addition to providing more stable income, annuities help offset the risk that investors will outlive their assets. And having an annuity that throws off income reduces the chance that retirees will have to draw on invested savings at a time when the market is weak.
One annuity option to consider is longevity annuities, which start paying out at some date in the future, like when an investor turns 80. The investor spends less for the annuity because of the delay, but receives protection against outliving savings.
Last year, the Internal Revenue Service added an incentive to consider longevity annuities: Money that goes into those contracts is not counted when the government calculates the minimum required distribution of your retirement savings.
Whatever you do, it's wise to start considering these questions sooner rather than later. Advice on saving for retirement is a lot more abundant than advice on how to draw down the money you salt away.
The good news, said Ward, is that that is starting to change. For financial experts, "I think its going to become much more the focus as the baby boomers start to retire in greater numbers," she said.
Even if you don't develop a full plan, thinking about the income you will have in retirement can encourage you to focus harder on saving.
"(People) begin not thinking about the nest egg, but they begin thinking about the income that can be produced from that nest egg," Keady said. "All of a sudden, people realize, 'Wait a second, I actually have to replace a paycheck.' "
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