The “How long will my money last?” question is a common one that doesn’t have a simple answer.
It’s pretty typical to think, “I have, say, $1 million saved, and since I generally spend X number of dollars a month (or year), my money will last “this” long. That means, if I only live 15 years, and if I’m lucky and don’t have any big health issues, then I should be okay.”
I want to discourage you from looking at your retirement needs this way. Instead, I want you to think of the duration of your retirement as something that will be endless. You have no idea how long you are going to live, or how much money you are going to need, so there’s absolutely no reason to risk living uncomfortably 20 years from now because you budgeted your life thinking it would take you 15 years to spend $1 million.
IF you view your retirement as something that is going to last forever, then, by extension, your savings principal has to last forever, as well. And if your savings principal must last forever, then it isn’t necessarily the amount of money you’ve accrued, it’s what you do with the money you have that matters most.
You retire, but your work isn’t done.
Imagine your retirement as the continuation of your asset accumulation stage of life. True, you may not be working 9-5, but now you have a proxy (your savings and investments) going to work for you.
Ideally, when you retire, you’re working with a credentialed advisor to position your hard-earned savings to earn the income that supports you in the lifestyle you’ve determined you want.
You might wonder: “Yeah, but shouldn’t “X” numbers of dollars be enough?”
It should, but it usually isn’t. Here are 5 reasons why the old school thinking of just saving “X” number of dollars for retirement no longer applies, and why you need to work closely with someone who can help make your savings keep earning income long after you’ve retired.
1) Lifespans are increasing at an incredibly fast clip.
Modern medicine is keeping us alive and healthier longer than ever. If you merely divide your current expenses by your current (or projected) savings, you’re at risk of falling victim to one of the biggest fears of many retirees: outliving your savings. (40% of Americans over the age of 50 say that running out of money is their #1 retirement fear.) [1]
2) Your expenses won’t stay static during retirement.
You can’t calculate the longevity of your money merely by what you spend today. From familial financial emergencies, to tree limbs falling on garages, to medical and health issues, if you could somehow look into the future and have your retirement expenditures applied to a line graph on a spreadsheet, it would probably look like a jagged mountain range (with a lot more expensive peaks than low-cost valleys).
3) Inflation takes big bites out of your buying power.
Even if inflation remains low, at, say, just 3%, on $1 million saved, you’re losing $30,000 a year in purchasing power.
Hard to wrap your head around, isn’t it?
Inflation is one of those things that, for most people, seems to fall just outside their retirement preparation consciousness. It shouldn’t. Think of inflation as a never ending expense that gives you nothing in return. Inflation (and low interest rates) are the reasons you can no longer feel good about having $1 million stashed in a typical savings account (basically, inflation means you’re losing buying power every month).
4) Distribution Rate (the “draw down” of your savings).
This is where a well-allocated and conscientiously invested portfolio is essential to help make sure you don’t outlive your money. I discuss this in great detail in Chapter 7 of my book, Personal Decision Points. When you begin using the principal of your savings to pay your day-to-day expenses, you not only deflate your nest egg (and shorten its life), your progressively smaller nest egg now generates less income.
5) Rate of Return.
This is one of the reasons why working with a qualified, credentialed advisor is so important. Your retirement savings isn’t a mountain that slowly recedes as you “mine” it to pay your expenses. Think of it as active. You want your savings (and other investments) to generate enough income that, if at all possible, you leave your principal entirely (or mostly) untouched.
Conclusion
Not spending the principal of your savings in order to live is a new concept to many people. But when you work with Allworth Financial, the approach we take is concerned with asset preservation and making your money last. You do not need to spend the last ten (or so) years of your life with a lower standard of living than you’ve experienced over the last 40.
Working with Allworth Financial can help you retire well.
[1] Transamerica July 10th, 2017
