Calculating Risk and Investing Wisely

Planning for Retirement? Here are 4 Ways to Help Avoid Running Out of Money

Americans are not doing a very good job planning for retirement.

According to the U.S. Department of Labor, only 50% of Americans know how much they will need for retirement.

You may be surprised to learn that the average American will need to live off savings for 20 years in retirement.

Yet, according to Vanguard, Americans have only approximately $141,542 saved on average.  Most people have much less.  The median 401(k) balance is only $35,345.  Even those at retirement age (65 and older) are woefully unprepared to live off their savings for an extended period.  The average savings of this age group is only $280,000.

According to the Center for Retirement Research, almost 50% of Americans are at risk of not being able to maintain their quality of life in retirement.  Based on 2019 data, 40.6% of all U.S. households, where the head of the household is between 35 and 64, are projected to run out of money in retirement.

If you want to avoid being part of this scary statistic, here are the steps you need to take to plan for your retirement without running out of money. 

How to plan for retirement 

1.  Start saving early

While it’s never too late to start saving for retirement, the sooner you begin, the better.  By starting early, you’ll receive two powerful benefits:

a.  The total amount you save will likely be greater because you will contribute over a longer period.

b.  You’ll benefit from “the miracle of compounding,” which means your savings and the earnings on your savings will increase and potentially grow each year.

Compounding can have a seismic impact on your savings.  You can run calculations showing the effect of compounding with this calculator provided by the U.S. Securities and Exchange Commission.

2.  Set a goal 

Responsible retirement planning starts with setting a goal.  That goal, at a minimum, should be to accumulate enough savings so you (and your spouse or other dependents) can live off your savings for possibly a long time.

Financial planners estimate that you may need 70–90% of your pre-retirement income to maintain your quality of life.

Once you understand how much you’ll need to fund your expenses in retirement, you’ll need to calculate what percent of your savings you can safely withdraw annually without running out of money.

You may have heard of the “4% rule.”  It suggests that you can withdraw 4% of your total savings in your first year of retirement and adjust that amount in future years to account for inflation.  The premise of the 4% rule is that those who follow it are unlikely to deplete their savings over a 30-year retirement.

The 4% rule is not without its detractors.  You can find alternatives here.

Application of the 4% rule can be sobering.  To fund a lifestyle that costs only $40,000 a year ($3,333 per month), you would initially need $1 million in savings.

3.  Social Security to the rescue

The much-maligned Social Security system remains an important part of your retirement planning.  According to the Department of Labor, on average, the amount you receive from Social Security will replace 40% of your pre-retirement income.

There’s much discussion about the viability of the Social Security program.  According to the Social Security Administration, benefits are expected to be paid in full until 2037, when the trust fund will be depleted.  At that time, Congress must enact legislation to provide for future funding.

4.  Invest intelligently

How you invest your retirement savings will profoundly impact whether you will reach your financial goals and secure your retirement.

Consider this advice from the legendary investor Warren Buffett:  “Both large and small investors should stick with low-cost index funds.”

While the financial media devotes most of its coverage to picking stock “winners,” predicting when to get in and out of the market, and trying to find the next “hot” mutual fund manager, you should focus on your asset allocation, broad diversification, and low fees.

The Securities and Exchange Commission discusses the importance of these factors in this publication.

Here’s further guidance from Buffett: “Investing is simple, but not easy.”

It’s simple because many investors could limit their retirement and non-retirement investments to just one fund offered by low-cost fund families like Vanguard and Charles Schwab.

For example, if suitable, you could purchase one of Vanguard’s Target Retirement Funds.  Pick one with a date in the name of the fund closest to your projected retirement date.  As you age, these funds automatically adjust each year to a more conservative asset allocation.  There’s nothing more for you to do.  Just set it and forget it.

Another solid option is Vanguard’s LifeStrategy Funds.  These funds have different allocations to stocks, bonds, and cash and rebalance automatically, so the allocation remains stable.  As your tolerance for risk changes, you’ll want to shift to another LifeStrategy Fund with a higher or lower allocation to stocks, so you won’t be taking too little or too much risk.

Why isn’t investing “easy”?  Because you’ll need to stay the course through stomach-churning ups and downs in the market without panicking and “fleeing to safety.”

According to Nobel Laureate Paul Samuelson, Investing should be more like watching paint dry or watching grass grow.  If you want excitement, take $800 and go to Las Vegas.”

Investors who ignore the financial media and simply hold a broadly diversified, low-cost index fund have historically been rewarded for their calm and patience.

If you follow these basic guidelines, you’ll be well on your way to a successful retirement.  To help you get started, consult with a fiduciary advisor today. 

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas

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