If you are thinking about retirement, one of your biggest concerns is how to make sure you don’t run out of money. In other words, you want your nest egg to last as long as you do. Even if you aren’t going to retire for another 10 or 20 years, you probably think about this from time to time. But what if you run some numbers and figure out you may not have the income you’ll need to retire?
One alternative of course is to simply reduce your annual retirement withdrawals by making permanent cuts in your retirement lifestyle. This may be very difficult to do. I believe that a better option is simply to delay tapping into your retirement account for a year or two.
Before you pooh-pooh this idea, give me a chance to explain. One or two years of extra work can make all the difference when it comes to your retirement income. This maneuver helps in two ways: First, your retirement investments will have higher balances. That means you have a bigger pot to draw on. And second, you won’t need to rely on your retirement income for as many years. Win-win! Lets consider an example.
Assume you are 65 now, you have $1 million in the nest egg and you want to draw $60,000 each year in retirement. Assume you also want to bump up your withdrawals by 3% every year to adjust for inflation. According to Investor’s Business Daily, your plan will likely blow up in 22 years even though you invest in growth mutual funds. That’s because you withdraw too much money too fast and then run out of money completely. This strategy really stinks because you’ll be 87 and be forced to move in with the kids or go back to work. Ouchie.
The solution? Find a way to push back dipping into the nest egg by two years. Either work longer, take a part-time job, cut your spending or some combination of the three. If you do so your account will last another six years. That’s because your balance will be $1.12 million when you start taking withdrawals.
Looking for more ways to stretch the nest egg? How about getting just 1% more on your investments? If you’re able to do that, your money lasts for a total of 35 years.
And of course, the final retirement nest egg stretch is to dip in less as I suggested.
What can you learn from this?
In my opinion, the most important take-away is to run some financial projections. If you do, you’ll know your options:
- Make minor cuts in spending.
- Pay a little more attention to your investments and make sure they are the best retirement investments possible.
- Increase income now or in the future.
- Delay digging into the nest egg.
You can mix and match all five. Going at it this way, your lifestyle won’t change much and you’ll have a lot less to worry about down the road. Running a plan won’t give you a 100% guarantee but it does give you the best possible way to evaluate what may be ahead and what the best response is.
How are you going to stretch your retirement nest egg?