ONE OF THE big concerns that many of us have entering retirement is whether we have set aside enough funds in our 401(k) plan to keep us funded until we pass.
It's hard to plan just how much money you will need because you don't know when you will die. You're saving money for a time without knowing how long it will last, and how much you should be withdrawing every month to make sure you don't deplete it.
The rule of thumb, according to interest.com, is to withdraw about 4-4.5% of your funds every year.
If you stick to this schedule, the theory goes that your funds should last you through at least 30 years of retirement. But this theory was hatched in the 1990s, when interest rates were much higher than they are today.
Another thing that's changed is life expectancy. It's easier today to outlive your retirement savings than in the past, because we are simply living longer.
For example, a man who turned 65 in 1970 could expect to live 13 more years. But by 2011, a 65-year-old man's life expectancy was 83, according to the most recent data from the Centers for Disease Control.
A woman's life expectancy at age 65 rose from 17 years in 1970 to 20 years in 2011.
With the combination of low interest rates and longer life expectancies, some financial planning professionals are recommending that the drawdown rate should be 3%.
Uncertainties to account for
The hardest part of planning for your retirement finances is the number of variables to account for:
- Uncertain longevity: You don't know how long you will live.
- Uncertain costs: While you can budget carefully, you can never be sure how much things will cost in the future.
- Uncertain returns: With changing interest rates and a stock market that is unpredictable, you can never be sure of your returns.
- Uncertain circumstances: Health issues eventually catch up with everyone and, depending on your health, you may need to outfit your home with special gear, or you may need a home assistant or nurse. That all costs money.
What you can do
Review annually: Review your retirement plan at least once a year, and as your circumstances change. A raise or a job change could occur, a windfall may come your way, or you could end up with a salary reduction. Make contribution adjustments accordingly.
Think of the big picture: You should figure out how much you might need in a lump sum if you were to retire. This can help you get an accurate picture of your needs.
Murphy's Law still reigns: Expect the unexpected and subscribe to Murphy's Law: "Anything that can go wrong will."
Give us a call if you would like to discuss this in more detail.