Retirement is one of life's phases which most people are afraid of especially when they cannot cater for their expenses in old age. It has become even more of a scare now that life expectancy has gone up and the economic times keep getting harder as each day passes. Still, we must prepare for such eventualities, and the best way is to have money you can turn to even when you are too old to work. Also although you saved enough, if you are not careful, the money can run out before you pass on which means you need to strategize on how to keep it for longer. With these few strategies, you can make your retirement savings last longer.
Delay to claim your social security benefits
Social Security helps in your old age by providing monthly checks, and in case of inflation, it cushions you against its effects. When you decide to begin taking social security benefits after you attain full retirement age, you become eligible to get the full benefits. You can opt to continue working even after you reach 62 years when you have the option of collecting early retirement benefits. However, you can delay collecting these benefits if you do not need the cash. For each year you delay cashing in on the benefits, you earn a credit of 8%.
Therefore, if your retirement is 67 years, you will earn 24% credit for the three years until you collect your benefits at 70 years since after 70 years, even if you withhold, you will not receive any more benefits. You will, therefore, increase your monthly checks by 24%.
Use the bucket approach in budgeting
In your spending, use the bucket approach which involves categorizing your cash depending on needs: short-term, mid-term and long-term. The first bucket is for short-term needs; that is assets you have set apart for short-term expenses and safety money to cover you for six to 12 months. It is usually money that has 1-3 years’ timeline. The second bucket is for mid-term needs and falls under the more conservative investments like CDs and bonds. It is money that you will not need in the next three to five years and as you delete the first bucket, this second bucket replenishes it. The third bucket caters for your long term needs; therefore, your objective for these assets is to invest them to generate income. It can also be for replenishing the first two buckets.
Reduce your expenditure
Cutting down on your spending is one of the most effective ways to ensure your retirement savings will cover you for a long time. You will, therefore, have to reduce your withdrawals from the retirement account every year which consequently lowers your tax bill. Most retirement income sources including pension income and annuity withdrawals are taxed at the ordinary income tax rate. Social security income, for some people, is partially taxable and that can significantly reduce your retirement savings.
You can lower your taxes in retirement by staying tax-free since tax-free savings grow continually because the interest is compounded annually. You should, therefore, withdraw from accounts funded with post-tax income to allow the tax-free savings to remain for a long time. You can also contribute to a Roth IRA that enables your money to grow tax-free. Further, with Roth IRAs, you do not have to take Required Minimum Deposits.
Increase stock allocation
You can start including a stick in your portfolio as you age but begin with low stock percentage such that it does not exceed 20% at first. As the year's pass, you can gradually increase the stock allocation in your portfolio to have at least 70% by the time you retire. High stock allocation enables one to sustain any high inflation rates during retirement. In retirement, you do not have a steady source of income, and you become vulnerable to the market dynamics especially in the initial years.
Check on your withdrawal rates
Traditionally experts advised retirees to follow the 4% in taking their withdrawals such that you withdraw 4% of your retirement savings in the first year then make inflation adjustments in the following years. However, bond yields have recently become lower, and stock returns are predicted to be average for the next few years which in turn has led to experts reviewing the 4% and instead now advise for 3% withdrawal rate. With the 3%, even if inflation rates go as high as 7%, retirement savings can still be sustainable but only if you have an asset allocation of 50% in stocks and 50% in bonds.
Written by Garrett Parker
Read more posts by Garrett Parker