Social Security might end up serving as a key source of income once you retire. But you shouldn’t expect to live on those benefits alone.
If you’re an average earner, Social Security will only replace about 40% of your wages in retirement, and most seniors need more like 70% to 80% of their former income to live comfortably. That’s where personal savings come in.
But in a recent New York Life survey, only 31% of respondents said they’re very confident that their savings will last throughout retirement. Worse yet, only 21% of baby boomers expressed a lot of confidence in their savings lasting.
If you’re worried that you’ll run out of money in retirement, boosting your IRA or 401(k) balance is a good way to make that scenario less likely. But that’s not the only thing you can do to avoid depleting your nest egg. In fact, one simple calculation could make it so you’re more likely to have savings to tap for all of your senior years.
Come up with the right withdrawal rate
The more strategic you are about taking money out of your savings during retirement, the less likely you’ll be to deplete your nest egg. To that end, it’s important to establish the right withdrawal rate from the start.
Since the 1990s, financial experts have touted the 4% rule, which states that if you start by withdrawing 4% of your savings balance when you kick off retirement and then adjust future withdrawals for inflation, your savings should last you a good 30 years. But at this point, the 4% rule may be outdated.
For one thing, bonds were paying a lot more interest when the rule was established, compared to today. And since seniors are often advised to shift over to bonds, that means their savings may not generate enough growth to support a 4% annual withdrawal rate.
Plus, some people are forced to retire early, and that means their savings may need to last more than 30 years. Similarly, some people actively choose to retire early and land in the same boat.
As such, relying on the 4% rule isn’t the best idea. You can use it as a starting point, but a better bet is to crunch some numbers yourself and see what withdrawal rate makes sense for you. Consulting a financial advisor could also be a good bet.
You may decide that a 2.5% withdrawal rate is a safer bet for you, based on a family history of longevity. Or you may decide to go with a 3% withdrawal rate. You might even decide you’re safe to go higher than 4% when it comes to taking money out of savings. But again, that’s a choice to make based on your personal circumstances.
Approach retirement with more confidence
Feeling uneasy about the staying power of your savings isn’t the best way to kick off retirement. While boosting your nest egg could help you feel more confident about your long-term prospects, establishing a smart withdrawal strategy is equally important. Doing so could change your retirement outlook — and help you get more enjoyment out of your senior years.
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