When your savings accounts are not on track with your savings goals, it may be time to adjust your retirement plan. Working longer isn’t always the answer, especially when considering your age and quality of life down the road.
According to the Social Security Administration (SSA), the average life expectancy in the early 1930s was 58 for men and 62 for women. However, the full retirement age, or FRA, back then was 65 — anyone who lived long enough to collect benefits was already playing with house money. Social Security benefits certainly lasted longer, and people didn’t live much longer than age 50 or older, let alone stop working before then.
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For today’s retirement savings calculator, a 62-year-old man has a 40% chance of living to 85 — nearly 1 in 5 men will live to 90. Women have a 52% chance of blowing out the candles on their 85th birthday once they hit 62 — 31% will live to 90 and nearly 1 in 5 will make it to 95.
The average life expectancy without regard to factors like race and gender is 76.1, but there’s a good chance you’ll live well beyond that even if you retire at age 70. Baby boomers have to plan for their money to last 15, 20 or — if they retire early — even 25 or 30 years.
Living a long time after retirement can put stress on your retirement savings accounts including 401(k) plans and individual retirement accounts (IRAs). So, how much money is enough? GOBankingRates asked the experts.
Since $10,000, $100,000 and $1 million mean different things to different people, the right amount of cash will be unique to each person. Whether you need to assess your retirement benefits, employer matches or contribution limits, getting the best investment advice can make assessing your retirement plan more streamlined. Here are a few ways to find your number.
One common method for nest egg estimation is to base your goal on a set number of years times your current income.
“Considering factors like inflation, the potential for a recession and today’s longer life expectancies, it’s recommended to have at least 10 to 12 times your current income saved for retirement,” said Kami Adams, a retirement income specialist with Creative Legacy Group.
Other experts recommended a more conservative eight or nine years.
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Another strategy is to calculate a percentage of your current income based on the expectation of lower living costs in retirement.
“Retirees typically pay lower taxes, are no longer paying a mortgage and do not have dependents to support, lowering their day-to-day expenses,” said Laura Sterling of Georgia’s Own Credit Union. “A general rule of thumb is that retirees need 60% to 80% of their preretirement income to live comfortably.”
With this method, then, your number might be 70% of your current annual income multiplied by 15, 20 or however many years you think you’ll need it to last.
A third strategy involves planning based not on your income, but on your projected expenses.
“As a rule of thumb, aim for a retirement savings balance that is at least 25 times your projected annual expenses during retirement, adjusted for inflation,” recommended Johannes Larsson, the CEO of Financer.com.
“In accordance with the 4% Rule, which assumes that if you withdraw 4% of your retirement savings each year, your money should last 30 years or more.”
For example, if you expect to spend $50,000 a year in retirement, your number would be $1.25 million ($50,000 x 25).
If you’re not sure whether you have enough to retire comfortably or will be able to afford the income tax, some further planning is probably in order.
“A few years prior to retirement, baby boomers should realize that they will be transitioning from the accumulation phase to the distribution phase of their financial lives,” said Cameron Valadez, a certified financial planner (CFP) and partner at Planable Wealth.
“These two phases operate very differently and have very different risks. Before a new retiree enters the distribution phase, they should utilize the couple years leading up to retirement as a preparation phase.”
The two-year, pre-retirement preparation phase is all about anticipating what’s called the sequence of returns risk.
“This risk essentially refers to the fact that the timing of which you decide to retire may not play well with the behavior of your various investments,” Valadez said.
For example, many currently think a recession is imminent. If you’re retiring in the next few years, that could shrink your nest egg just when you need to start drawing from it, shaving years off your long-term wealth and causing you to outlive your money.
“To help reduce this risk, a pre-retiree can use the preparation phase to begin building up or re-allocating a cash reserve,” Valadez said. “This will allow you to withdraw funds in the first couple years of retirement without the need to sell investments to raise the cash.”
Valadez said you should spend the preparation phase building two years’ worth of retirement income to avoid having to sell assets at a loss in case of economic turmoil — kind of like an emergency fund for your retirement fund.
Say you need $40,000 a year, you’ll have to account for inflation at the long-term annual average of 3%, which Valadez calculates as $42,436 for the first year and $43,709 for the second.
“Therefore in this basic example, a retiree would want $86,145, an emergency fund of somewhere between three to six months’ worth of expenses, plus cash set aside for any planned expenses such as a vehicle or major home repair, etc., in cash.”
That’s on top of your retirement nest egg.
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This article originally appeared on GOBankingRates.com: Here’s How Much Cash Boomers Need To Retire in the Next 5 Years
