How Long Will Your Assets Last During Your Retirement Years?
by Gabriel Lewit
“How long will my assets last during retirement?”
This is one of the most common questions that I get asked when I’m meeting with new clients for the first time.
Let’s face it – the future is always a big unknown, and in retirement, the biggest unknown of all is precisely how long you’ll live and whether your assets will last you through your retirement years!
How do you find the answer to this question? What variables have the biggest impact on your success? Or, if you’re worried about running out of assets in retirement, what steps can you take to ensure that you don’t?
These are great questions, and the answers have important ramifications.
After all, you only get one shot at retirement. That’s it… just one! Thus, it’s important to do it right the first time around.
The worst thing that can happen is that you don’t plan successfully, and you inadvertently run out of assets at age 80, or 85 – but you’re still living healthy and/or active.
When this occurs, you’re left living strictly on Social Security, having to go back to work part-time or turning to family for financial support – none of which are typically attractive options!
Let’s take a look at three easy steps to assess whether or not you will run out of assets during your retirement years.
Step #1 – Running a Financial / Retirement Projection
The most important thing you can do to assess if you’ll run out of money in retirement is to build an accurate financial / retirement projection.
A financial projection is a component of a comprehensive financial plan. In fact, it may be the most important component of your planning!
At its core, a financial projection is simple. It looks at your overall assets, income and your expenses year-by-year from now until you pass away. The key, however, is that you are being as detailed and as accurate as possible within this projection.
What makes a good financial projection compared to a bad one is the level of attention and detail that is included within the projection. There are simply TOO many variables that need to be considered to try and tackle this on your own and ensure it’s accurate.
For example, here are just some of the variables that we include for our clients’ retirement projections at SGL Financial:
- Expected salaries and bonuses
- Savings, contributions and employer matching
- Anticipated increases to salaries and savings
- Projected Social Security benefits
- Cost of living adjustments and inflation increases
- Current detailed budget of expenses
- Anticipated expense changes, year-by-year
- Lowering of future expenses based on retirement “lifestyle phases”
- Including annual healthcare costs / insurance costs in retirement
- Adjusting plan expenses for when mortgages/debt are paid off
- Accounting for “fun money” expenses during early retirement
- Large purchases such as home downsizing, new cars, or similar
- Anticipated rates of return both pre-retirement and in retirement
- Assessing the impact of down-market conditions and volatility
- Reviewing various income distribution strategies
- Calculating anticipated tax-ramifications year-by-year
- Plus much more…
When you look at this list, it can get complex very quickly! Sometimes, clients come to me and say that they’ve done their own financial projections online and they “look pretty good.” But, when we dive into the level of detail included above, that picture can change dramatically.
So, what about you? Have you ran your own financial projections? If you have, did it include everything listed above? How accurate do you think your own retirement projections are?
Step #2 – Assessing Your Initial Retirement Projection
Once you run your initial financial projection, a couple of things might happen. Let’s take a look at the possibilities.
- Your Financial Projection Looks Terrific!
When this happens, give yourself a pat on the back. You’re in great shape. Now, the most important thing is to not mess it up. Seriously, though. We’ve all read the stories of lottery winners that have millions of dollars and somehow burn through them all. Or wealthy athletes that end up broke. While you may be in terrific shape today, you must ensure that you have a concretely defined retirement plan and an advisor to stay disciplined and ensure you don’t inadvertently burn through all your money.
- Your Financial Projection Looks Just “OK”
Perhaps you thought you’d end up leaving $5 Million dollars to your kids and, upon running your financial projection, are now realizing that you might only leave them $500,000. Or, perhaps you are realizing you need to work 5 years longer before you can retire successfully. No matter what your initial expectation was, you’re not quite where you want to be financially.
- Your Financial Projection Doesn’t Look Good… At All…
Ok, you ran the numbers hoping for the best, but expecting the worst, and sure enough, it’s showing you that you don’t have enough money to last through your retirement years. What do you do now? Do you hit the panic button? Not yet! What’s important here is some perspective. It’s far better to know, well in advance, that your financial picture isn’t looking great, so you actually have time to do something about it.
No matter where your initial financial projection comes out, what’s important is that you’ve taken the time and the effort to create one. That’s the first step towards ensuring retirement success and in making sure that you don’t run out of assets during your retirement years!
Step #3 – Adjusting the Variables & Ensuring Accuracy
The third step is to start “modifying” or “playing” with your financial projection in order to get it to look precisely how you want to – and to ensure that it’s as accurate as possible with the goals you have planned for yourself at this moment in life.
Now, you don’t want to get too crazy here. It’s not like you can just tweak your investment rate-of-return from 5.00% to 10.00%! Sure, it will look great in your financial projection, but it’s not realistic. That’s why it’s important to ensure that everything is not only adjusted correctly, but also accurately.
Working with an advisor, like SGL Financial, can help you to ensure that your plan is adjusted and refined both accurately and to account for “what-ifs” or worst-case scenarios.
For example, here are some “what-ifs” that you may want to keep in mind or explore:
- What if I lose my job?
- What if I double my savings before I retire?
- What if I retire at age 65 instead of age 60?
- What if the market drops -25.00% two years before I retire?
- What if the market drops -25.00% three years after I retire?
- What if I reinvest my RMDs instead of spending them?
- What if Social Security benefits get reduced in the future?
- What if the tax rates take a big hike during my retirement?
- What if I work part-time during my retirement years?
- What if I downsize and move into a smaller home, freeing up equity?
- What if I pay off this debt sooner than later?
- What If I am more aggressive instead of more conservative?
Trying to do this on your own is challenging if not impossible. Most individual investors don’t have the knowledge or the software tools to pull this off effectively.
Yet, all of these variables and what-ifs have a huge impact on precisely how much assets you’ll have in your retirement years… or if you’ll run out of assets unexpectedly!
How Long Will Your Assets Last You During Retirement?
Back to our original question… how long will your assets last you? It’s truly impossible to tell until you run the numbers and create your very own, personalized retirement projection.
If you’re wondering how long your money will last you in retirement, or if you’ve never ran a professional retirement projection before… don’t go it alone… and please don’t just leave it to chance. It’s perhaps one of the most important things you can ever do with your finances.
Best of all, when your retirement projection is completed, accurate and fine-tuned, you’ll be able to truly live and enjoy your retirement years with total confidence and financial security.
Until next time!