Americans are living longer than ever before. That’s great news, but it has a downside—the possibility of outliving our life savings. According to the Social Security Administration, a 65-year-old man can expect to live to age 84, on average, while a woman of the same age may make it closer to age 87. So if you retire at the age of 62, your nest egg may have to last for at least 20 years. Sure, Social Security will provide an income stream, but the amount is not enough for most retirees to live comfortably.
Little wonder, then, that according to a survey by the Transamerica Center for Retirement Studies, the most frequently cited retirement concern among Americans is outliving their savings and investments. In the survey, 44% or respondents across all ages expressed this fear, as compared to 41% of retirees. In addition, 47% of retirees believed they had not amassed a nest egg large enough to make it through retirement. An article in Kiplinger addressed this issue and offered advice on how to avoid going broke in retirement. Here are some of the highlights.
Don’t abandon stocks.
Yes, stocks can be risky. In January, Standard & Poor's 500-stock index was a roller coaster ride, with frightening drops and exhilarating climbs, but it the end it wound up down 5% for the month. Meanwhile, “expert” opinions online and elsewhere seem just as inconsistent. One investment guru claims the market is headed for imminent, unprecedented collapse, while another predicts record highs for years to come. Market volatility and commentary like this leads many retirees to abandon stocks. Unfortunately, without stocks it is very difficult to get the growth you need to live comfortably for 20 years or more after retirement.
What should you do? While there is no universal formula, many advisors recommend moving to 60% stocks as you approach retirement, trimming back to 40% stocks in early retirement, and holding just 20% of your portfolio in stocks later in retirement.
Tap retirement accounts in the proper order.
Lacking a sound withdrawal strategy can be costly. According to Carrie Schwab-Pomerantz, Chief Strategist for Consumer Education at Charles Schwab, the most tax-efficient approach is to first draw down the principal from maturing bonds and certificates of deposit, since they are no longer bearing interest. After that, if you are 70½ or older, you should take your required minimum distributions (RMDs) from traditional tax-deferred accounts, like IRAs and 401(k) plans, with a focus on assets that are no longer appropriate for your portfolio or overweight. This is because you will be subject to severe penalties from the Internal Revenue Service if you fail to take your RMDs on time. Next, you’ll want to sell from taxable accounts, since you only have to pay taxes on their capital gains. (It is important to note that if you are in the two lowest tax brackets you will not be subject to capital gains taxes.) Finally, you should take withdrawals from your tax-deferred and Roth accounts, in that order.
Don’t skimp on insurance.
Most seniors need to cut costs in retirement, but skimping on insurance is not the best way to do it. Maintaining adequate health insurance is particularly important. A serious illness or injury could be financially devastating and wipe out your life savings. While Medicare Part A is free for most retirees and covers hospital services, you have to spend more for Part B and Part D. (Part B covers visits to doctors and outpatient services while Part D is for prescription drugs.) Even with all of this, you might want to consider a supplemental Medigap policy for copayments, deductibles and the like. According to Schwab-Pomerantz, “Medicare is very complex, and it's more expensive than people realize. So it definitely needs to be part of the budgeting process."
You should also make sure you have adequate auto and home insurance. As people grow older, the chances of having accidents on the road and at home increase. According to the Centers for Disease Control and Prevention, adults 65 and older are injured in car accidents at a rate of 586 per day. In addition to your medical expenses, an adverse ruling in an accident related lawsuit could prove financially catastrophic. This is why you need to review your automobile and home insurance policies, and increase their limits if they seem inadequate. Or, purchase a separate umbrella liability policy. An umbrella policy will kick in if the limits on your primary policies are exceeded. Umbrella policies are surprisingly affordable, with premiums on a $1 million policy costing approximately $300 a year.