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Make It Last Longer

Nancy Patterson October 19, 2011 Easy Street 2 Comments on Make It Last Longer

5 Ways to Make Your Money Last in Retirement

Every day there is more bad news about our retirement. We are used to hearing that Social Security won’t be there for most of us in a few years, how some of the poorest people in our nation are the elderly and how none of us are building a big enough nest egg to last us through retirement. Nobody expects us to have enough money to last us all the way through retirement.

What’s worse is a study in 2008 by Ernst & Young found that nearly three out of five middle-class retirees will likely run out of money if they try to maintain their pre-retirement lifestyle.

While spending less and working longer will certainly help make your money last longer in retirement those are not your only options. There are five other money strategies you can take advantage of to ensure you don’t outlive your money! Check them out…

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1.    Smart Withdrawals

Once you’ve retired you’ll begin tapping into your nest egg for income. The key lies in balancing between withdrawing too much which runs you the risk of depleting your nest egg too soon and not withdrawing enough to maintain a comfortable lifestyle that can keep pace with inflation.

The industry standard is four percent annually, adjusting annually for inflation. The way the 4% rule works is that you start by taking 4% out of your nest egg in the first year. The next year you take out the same amount plus inflation. So, for example, if you retire at 65 with $1,000,000 in savings you would withdraw $40,000 (four percent of $1,000,000) that first year. Then the next year if inflation goes up by say three percent a year you withdraw $40,000 + 3% ($1200) = $41,200 from your retirement accounts. In year three you’d withdraw $42,436 ($41,200 + 3%). In year four you’d withdraw a little over $43,700 and so on every year after.

The 4% rule is really a guideline rather than a hard and fast rule. Retirees should cut back on withdrawals if their funds suddenly plunge, like from a market correction or recession. A big drop early in retirement is especially dangerous, since you would be drawing from a much smaller pool of assets, making it far more likely you’ll run out of cash.

2.    Tax-Efficient Withdrawals

Even in retirement you’ll have to pay taxes on certain income. One strategy to lower your tax bill is to spread your nest egg among different types of accounts that come with different tax consequences upon withdrawal.

In retirement you should withdraw money mainly from your taxable accounts (such as mutual funds, regular savings accounts, CDs and individual securities) first, before withdrawing substantial amounts from your tax-deferred(401k, traditional IRA, pension)  or tax-free (Roth IRA) accounts. This is a good strategy for two reasons.

One, drawing from a mix of taxable and non-taxable accounts will help lower your tax bill every year because you’re only paying taxes on a portion of the money you withdraw. If you withdraw money from your 401k you’ll be taxed on all of the money you pull out. But if you withdraw some money from your savings and some from your 401(k) then you will only pay taxes on the money withdrawn from your 401(k). This ensures you only pay a small amount of taxes each year, keeping it manageable.

Two, delaying any withdrawals from your tax-deferred accounts allows for the money in them to grow tax-free as long as possible. This allows your nest egg to compound. The larger the balance the more you benefit from compounding.

3.    Reverse Mortgage

Many retirees have paid off their homes by retirement, greatly reducing the amount of money they have to spend each month. If your home is paid off you can use the equity built up in it to help bridge any financial gaps in your retirement.  A reverse mortgage is a specialized home equity loan available only to people age 62 and older. It allows you to borrow money against the equity you have in your home. The bank will give you either a lump sum or send you monthly payments for as long as you live.

The disadvantage to this strategy is that it typically involves high fees which eat away at the amount of money you receive. It also won’t provide you with a significant amount of money. The maximum loan you can get in most cases is some percentage of $625,000 based on your age. Also recognize that you will have to stay in that home for the rest of your life or the loan becomes due.

4.    Delay Collecting Social Security

The longer you can wait to begin drawing social security the more you’ll benefit. The government allows you to decide what age you want to begin taking payments. You can start receiving benefits as early as age 62, as late as age 70, or any age in between.

45% of Americans choose to begin receiving social security benefits at age 62, the first year you’re legally eligible to do so. If you give in to immediate gratification and start collecting at age 62, your benefits will be reduced by 20 to 30 percent. This means that if full benefits at age 67 are $1,000 a month, Americans who are 62 and receiving benefits would only get $700-800 a month. If you wait until age 70 to begin collecting benefits you’d receive 32% more money or $1320 per month. That’s a possible monthly increase of $620!

If an extra $620 a month sounds good to you don’t think that waiting till age 72 will increase your monthly benefits even more. Benefits stop increasing after age 70 so it doesn’t pay to delay beyond then. Check out Social Security’s website to calculate how much you may receive in retirement.

5.    Rebalance Your Portfolio

The rule-of-thumb is that retirees should be more conservative with their investment portfolio since they have less time to recover from market downturns. As you age your financial planner might advise you to slowly move over more and more over your money to safe investments like bonds, CD’s and money market accounts. However, being too conservative puts your money at risk from inflation. Instead, keep a healthy mix of assets throughout retirement. Even well into retirement your investment portfolio should contain at least 20 percent of stocks and other aggressive growth investments. This will ensure that even when you are withdrawing money from your retirement accounts, the rest of it will continue to grow and compound year after year.

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Keeping Money in Your Pocket,

Nancy Patterson


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