Many workers look forward to retiring and enjoying a more relaxed lifestyle. But while not having a job to go to will free up your days, it can also make for a stressful financial situation. Without a paycheck, you'll be reliant on your retirement savings, as well as your Social Security benefits to cover your expenses. And while Social Security pays benefits for life, your savings have the potential to run out.
It's this very notion that worries 49% of Americans today, according to the May 2020 Simplywise Retirement Confidence Index. If you're concerned about outliving your savings, here are some key steps to take.
1. Understand what retirement will cost you
It's easy to assume that your expenses will drop dramatically once you stop working, but most seniors find that they need 70% to 80% of their former income to live comfortably. Think about the things you expect to spend money on during retirement, and do your best to draw up a budget that outlines them clearly. That way, you'll have a ballpark estimate of what your senior years might cost you.
Keep in mind that healthcare is one expense that tends to rise during retirement, not go down. Though you can't predict what medical issues you'll encounter as you age, you can read up on senior healthcare costs to get an idea of what you might spend.
2. Pad your retirement savings
The more money you have in your 401(k) or IRA going into retirement, the more financial security you'll buy yourself. As a general rule, it's smart to enter retirement with 10 times your ending salary socked away, so if you're nearing the end of your career and you're not there yet, aim to ramp up. Cut back on spending so you're able to increase your savings rate, and take advantage of catch-up contributions in your retirement plan if you're 50 or older.
3. Figure out how much money you can withdraw safely from savings each year
You shouldn't just take 401(k) or IRA withdrawals in retirement without putting thought into it first. Rather, figure out what percentage of your savings you can afford to remove on an annual basis to ensure that you don't deplete your retirement plan prematurely.
For years, financial experts have sworn by the 4% rule, which states that if you take out 4% of your 401(k) or IRA balance your first year of retirement and then adjust subsequent withdrawals for inflation, your savings should last 30 years. The 4% rule is a good place to start, but keep in mind that it may not be right for you.
For example, if you're retiring on the younger side, you may need more than 30 years' worth of savings. And if your 401(k) or IRA is invested very conservatively, you may not see enough growth in that plan to support a 4% annual withdrawal. Play around with different scenarios to see what makes the most sense for you, keeping in mind that you can always adjust your withdrawal rate as you go or if your circumstances change.
Running out of money in retirement is a serious concern. Take the above steps to mitigate it -- and buy yourself some much needed peace of mind.
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