One reason retirement funding may mystify you: How do you know when you saved enough so you won't run out of money during your golden years? The answer begins with an understanding of your day-to-day expenses, and how those expenses may change in 30 or more years of retirement.
According to a recent survey from the Employee Benefits Research Institute, 84 percent of future retirees believe their savings will cover their post-career years — yet fewer than 1 in 3 respondents calculated how much they will need. Only around 20 percent had more than $100,000 set aside.
A conventional savings rule says you withdraw no more than 3 percent to 5 percent each year from your retirement savings to make your money last — a sustainable rate of withdrawal. Opinions vary about appropriate sustainable rates. Working with the above range will get you close.
This equates to $1 million in retirement funds for you to withdraw $30,000 to $50,000 each year.
Don't despair: There are ways to increase your sustainable rate of withdrawal while still maintaining some certainty that your money will last.
The first and possibly most critical factor is to plan and then monitor your plan closely, either on your own or with a financial pro. Your plan needs to include projections or modeling to show what your future income might be based on your sources of income, such as retirement savings, Social Security and the like. Review your plan annually.
Second, adjusting your portfolio holdings can also boost your level of sustainable withdrawal. More risk in your holdings is actually good for your long-term holdings. Without some exposure to risk, your funds will fall behind the rate of inflation.
The third important factor regarding your savings' sustainability: the pattern of income that you'll need in retirement. Over three or more decades, your income needs will likely change. During your first several years, you'll likely spend more than average as you travel or take on new hobbies. Later in retirement, many people lower expenses as they become more sedentary, not traveling as much and having fewer extraneous expenses.
It's best to maintain a realistic view of your own life span, erring on the long-term side. It's not unreasonable to project a retirement plan to your late 90s. With planning, that can be completely good news.
Jim Blankenship is a fee-only financial planner who writes for AdviceIQ.