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Managing your money properly in retirement is critical for ensuring that it lasts as long as you do.
For example, imagine you have $1.3 million in a 401(k) before age 60. While this is a considerable amount, a 4% withdrawal rate would only generate $52,000 per year. You’d also run the risk of running out of money by the time you turn 90.
So for someone looking to retire in a few years, what can they do to make sure this size portfolio lasts the rest of their life? While some people relish the challenge of answering this question themselves, many stand to benefit from working with a financial advisor who can build them a custom retirement income plan based on their assets and spending needs.
This question raises an issue called “longevity risk” – the risk that you will outlive your savings.
Managing longevity risk is sort of like playing a hand of poker. You know some of the details, like how much you have in savings. You can control others, like how much you spend each year. But you can’t know everything, particularly how long you will live.
As Steve Davis, CEO of Total Wealth Academy puts it: “There is no expiration date on the bottom of your foot.” The standard advice is to overestimate how long you’ll live and manage your money accordingly. Then again, a financial advisor can also help you build a retirement plan that seeks to mitigate longevity risk.
It’s important to anticipate and project how much your 401(k) could be worth by the time you need to start withdrawing from it. At age 59, an investor still has nearly a decade before they reach full retirement age (FRA) – the point at which they’re eligible for full Social Security. While plenty of people retire before FRA, it’s a logical retirement age for many.
For example, say that you’re 59, plan to retire in eight years and your 401(k) is invested in an S&P 500 index fund. If the market were to average a 10% annual return over the next eight years, your portfolio could grow to $2.78 million by retirement. This is before accounting for any ongoing contributions that you’d potentially make in the coming years. By contributing $30,500 per year – the most a person 50 and older can contribute to a 401(k) in 2024 – your portfolio could be worth as much as $3.13 million by age 67 if the market averaged 10% each year.
This doesn’t mean you should plan for these specific returns. Volatility and risk management are real issues. People nearing retirement also tend to shift toward more conservative investments, so returns could be significantly lower. The point is to plan around what your portfolio likely will be worth by the time retirement arrives. If you need help aligning your retirement portfolio with your need for growth or capital preservation, consider connecting with a financial advisor.
