One of the most common fears of those nearing retirement is that their savings will not last for the entirety of their retirement. Assuming you have saved enough that a reasonable withdrawal rate (3 or 4% for most people) will cover your current expenses there are three primary dangers to your retirement savings. These dangers are inflation, market volatility, and longevity.
Inflation can quickly erode your buying power. Even at a relatively modest inflation rate of 3%, you will need two and half times your current annual income to maintain your standard of living in 30 years. One way to combat inflation is to keep a percentage of your portfolio in stocks. The stock market has historically produced returns greater than inflation.
The longevity risk is similar to the inflation risk. The longer you live, the more inflation affects your standard of living and the more money you need to maintain your reasonable withdrawal rate. Keeping a percentage of your portfolio in stocks will also help combat this risk.
Of course, the problem with keeping a percentage of your portfolio in stocks is that you are exposed to market volatility. This is somewhat reduced since you are planning for at least 30 years of retirement. Although stocks are often down in the short run, over a period of 30 years the stock market has in the past always produced positive returns. There is no guarantee that the stock market will continue to do that in the future, but it seems like the best bet. You need to research what percentage of stocks will work for your retirement needs, or discuss them with a trusted adviser. If you have a significant part of your retirement portfolio in stock you should increase your chances of your savings lasting through your retirement.
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3 responses to “Making Your Savings Last in Retirement”
My husband retired two years ago, and it has been a little tight at times. My advice to my children is start planning now, don’t wait until your in your 40’s or 50’s! When you’re young you seem to think you have plenty of time for saving, but time goes by so fast, it’s here before you know it.
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Anita is right, when you start earning always keep this in mind… Income – (keep your) savings= budget. Might be easier said than done so we need to practice and turn this into a habit.