The risk of outliving your savings is greater than ever, thanks to factors such as longer life expectancies and the diminishing role of pensions and Social Security. According to the Society of Actuaries' 2000 Mortality Tables, 82% of couples who are age 65 can expect to live until age 85; 60% to age 90 and 33% to age 95. By having a plan to secure a comfortable retirement and making the right financial choices, you can help ensure your retirement income lasts.
"The biggest risk that future retirees face is running out of money — and losing financial independence," says Craig Brimhall, vice president of retirement wealth strategies for Ameriprise Financial. "You've got to plan ahead so your money lasts as long as you do."
Given the potential for a lengthy retirement, it's important to keep your savings growing rapidly enough to at least keep pace with inflation and help protect against its negative effects on your purchasing power.
Historically, stock is the only asset class that has outpaced inflation over time and is vital if you're looking to increase the size of your portfolio. "Even retirees need a significant allocation of stock assets," says Brimhall. "Bonds alone won't do the job."
On the other hand, bonds and other fixed-income investments are instrumental in helping reduce your portfolio's overall volatility and protecting the value of your investments during occasional stock market downturns. Brimhall suggests that retirees begin their planning with a balanced mix of stocks and bonds, then make adjustments based on their goals and risk tolerance.
Many retirees also include annuities in their investment mix. Annuities allow you to generate a reliable retirement income stream over your lifetime, and can offer features that guarantee a minimum level of income or that adjust payments for inflation.* Annuitizing works much like a traditional pension, helping you avoid the risk of outliving your money.
Effect of withdrawal rates on how long your money may last
This chart shows the impact of withdrawal rates of 4% to 9% on an investment of $500,000 in 1972 through 2005, taking into account inflation. A withdrawal rate of 4% allowed the income to grow, while a 9% withdrawal rate depleted the funds in less than 10 years.
Portfolio is made up of 50% stocks and 50% intermediate-term bonds. All dividends and interest are reinvested. These figures are for illustration purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses or taxes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
Sources: Stocks — Standard & Poor's 500 Index; Bonds — Lehman Brothers Intermediate-Term Government Bond Index
Make the most of your future
As you review your retirement goals and accumulated savings, you may find you're already on target to achieve a comfortable and secure future. If you need to get back on track, consider cutting back on your spending to enable you to save more. You might also consider delaying retirement for a few years, or continuing to work part time or as a consultant to supplement your income. Adding even a small amount of additional income early in retirement could help your savings last longer, and keep you socially connected.
Simple multiplier
How much do you need to save for the retirement you envision for yourself? This calculator can help you find out.
A financial advisor can help you prepare for a steady income stream during your retirement, with strategies designed for your unique situation.
Financial planning topics brought to you by Ameriprise Financial.
Ameriprise Financial Services, Inc., Member FINRA and SIPC.
Copyright 2006 Ameriprise Financial, Inc. All rights reserved.
The views expressed above reflect the views of Ameriprise Financial as of the date referenced. These views may change as market or other conditions change. This article is not intended as and should not be used to provide investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs and objectives, goals, time horizon and risk tolerance. Information described in this article may not reflect all investors. Past performance is no guarantee of future results. No forecast should be considered a guarantee either. Consult your financial advisor for more information.
Brokerage, investment and financial advisory services made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.
*All guarantees are based upon the claims-paying ability of the issuing company and do not apply to the performance of the separate accounts, which will fluctuate with market conditions.