Imagine working 40 years to fund a retirement that will last for 30; does it sound impossible? Not if you live in a perfect world—but this isn’t, so that’s why we’ll be talking about whether your investments cover 30 years of retirement here.
A 30 year retirement is becoming the reality for more people all the time. It happens when people retire at 62 or even 65, and then live into their 90s. This is happening for more people than ever and by all indications it will be even more common in the future.
Even if you don’t think you’ll live into your 90s, prudence dictates that you be prepared anyway. Healthier living and stunning medical advances are causing people to live far longer than they ever expected and the possibility that you’ll be one of them is increasing steadily.
Will you be ready for it financially?
It’s at least a bit ironic that something that we all strive for—a very long life—could have a downside, but it does. The longer we live the more doubtful it is that we’ll be able to support ourselves financially.
Let’s face it, 30 years is a long time to survive without working.
What can we do to prepare for a retirement that will last for decades? Here are some thoughts.
Maximize Retirement Contributions
This suggestion is so obvious it shouldn’t even be mentioned, but let’s do it anyhow. Obviously the more money you have saved the better your chances of funding a three decade long retirement. That means maximizing 401k and 403b contributions through your employer, as well as making regular (and relentless) contributions to traditional or Roth IRAs.
Delay Retirement Withdrawals as Long as Possible
The “B Side” to maximizing retirement contributions is to minimize withdrawals. That can take the form of taking lower withdrawals early in retirement or even taking none at all for the first few years.
Any money not withdrawn will not only be available for later years, but it will also continue to grow.
This is a step that must be prepared for in advance as alternate income sources will have to be lined up in advance. Speaking of which…
Have a Part-Time Business or Career to Partially Fund the Early Retirement Years
Ultimately, it may not be possible to live on retirement savings for 30 years without going broke in the process. That may require at least a limited reliance on some form of continued employment. If that’s the case, it will be best accomplished in the early years of retirement when your health is at peak and your work skills are still sharp.
Find some sort of business or job that you can do on a part time basis, that isn’t as stressful as the career you have now, and that you can do for as long as you choose.
It would be better still if the venture is in a field that you actually like to do so it won’t impair you’re retirement in the way a “real job” would.
So start giving some serious consideration to how you can make your dream job happen.
Continue Making Retirement Contributions Into Retirement
One of the less emphasized benefits to having some sort of business or job in retirement is that since the income is “earned”, it can also be contributed to tax sheltered retirement accounts, at least up until age 70 (bonus: there’s no age limit on Roth IRA contributions!). So not only are you using the income from your post-retirement business venture to help support you, but you can also use it to increase your retirement savings for the day when full retirement hits.
Delay Collecting Social Security Until Age 70
By delaying Social Security benefits to age 70 you can increase your income substantially. The law allows for an increase in benefits of 2/3 of 1% per month for each month you delay the collection of benefits past your age of normal retirement. That works out to 8% per year.
If normal retirement for you and your spouse begins at age 67 — as it will for anyone born from 1960 on — you can increase your monthly Social Security benefit by as much as 24% by delaying collection until you turn 70. (Just in case you were wondering: you can still enroll for Medicare at age 65 even if you aren’t on Social Security.)
Invest for Growth Even After You Retire
One of the “advantages” to earlier times when people lived just a few years into retirement was the now focus, as in the-future-is-now and all preparations up until this point were for this very time. That thinking does not apply when retirement will be measured in decades.
What this means is that you’ll need to have a long-term view of your retirement investments well into retirement. You’ll have to make them last at least 30 years and that requires an entirely different strategy.
Where earlier cohorts of retirees had the luxury of using their retirement investment earnings entirely for current living expenses, we’ll have to set some aside for future growth. That will mean that we won’t be able to convert 100% of our investments to safe, interest bearing fixed-income assets like our parents and grandparents did. We’ll have to invest for growth, as in growth stocks and other investments likely to appreciate in value.
Moral of the story: don’t fire your financial planner at retirement!
You can try any one or a combination of the recommendations above, but be sure that you do something.
Retirement will be here before you know and the time to prepare is now.
That is the one element that you can not validate until you get there. How do you know you have enough? I structured my retirement savings to last at least 30 year in retirement. I have fixed income and income that grows along with inflation. Even the fixed income grows with inflation.
It’s something you have to monitor and look at over time. I think a big part of looking at your retirement investments is being realistic about the money that is there and if it will really sustain you.
I think people need to focus on an intentional income stream….it is scary to just hope for steady stock growth and then sell and withdraw. At least it would scare me.
Evan, what do you consider an intentional income stream? Are you talking dividend stocks and bond income or something else altogether?
I think the basic problem people have when it comes to running out of money in retirement is that they invest with a focus on asset appreciation instead of cash flow. For instance, our investment plan involves investing in stocks in our Roth IRA and automatically reinvesting the dividends. However, when we reach retirement age, we’ll simply stop reinvesting those dividends and withdraw them instead – not touching the principal. A broad index such as the S&P 500 has remarkably stable dividend pay-outs over time (and dividends typically keep pace with inflation), so even if the market loses 50% of its value the year we retire, the odds are that the dividends will only take a minor dip (if they dip at all). So who cares what our portfolio is worth? It’s how much it pays out that matters!
Thanks for sharing your plan Britt!
I think it can be anything as long as it is intentional. For me it will be a dividend based income stream, for other it will be their traditional pension, for others it may be real estate or a side business. Some even do Liability Driven Investing:
I know my retirement savings will not last until my last day. I cannot rely on Social Security either. Although having both of them may be good enough, I also have a second savings account to augment my expenses, which I hope will be sufficient to meet all my needs.
Cherleen, what can you do now to help endure your retirement savings last longer? It sounds like you are content with not having enough for retirement?
My view on the topic of not outliving your money: More people need to consider lifetime annuities (specifically, single premium immediate inflation-adjusted lifetime annuities).
In reply to your comment about continuing to invest for growth in retirement, I just want to share a study I recently encountered: http://wpfau.blogspot.com/2011/08/retirement-withdrawal-rates-20-preview.html
I was struck by the relative insignificance of asset allocation. The failure rates for portfolios anywhere from 30% stocks, 70% bonds to 70% stocks, 30% bonds are almost indistinguishable when we look at withdrawal rates of 5% or less. (Of course, that’s based on simulations using historical data, and the future could look very different in any number of ways.)
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I think most people underestimate the benefit of waiting to take their Social Security benefits. My mom took her benefits before her full retirement age, but my dad waited until he was 70 to start collecting. They worked at comparable jobs, but the difference between the amounts they receive now is huge. Thanks for explaining this to your readers.
If you can wait then yes, you will get more from social security. Still, I think you need to have a plan in place to make sure you can wait. Some people need that money right away unfortunately.