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People Grow Less Financially Secure as Their Retirement Progresses

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retirement-diceA recent report by the Consumer Financial Protection Bureau called "Financial Well-being of Older Americans" revealed an interesting relationship between age and financial well-being. The good news is that financial well-being tends to grow as a person's career progresses. This indicates that, in general, Americans are building wealth and saving for retirement.

The bad news is that financial health peaks around retirement age and then starts to fall off. This suggests that the financial realities of retirement are a little more difficult than some have expected.

The report surveyed Americans of various ages about different aspects of financial well-being. Understandably, the lowest average scores were recorded by respondents aged 18 to 24. Young people just starting out are likely to be at the low end of the wage spectrum and haven't had a chance to build savings.

Fortunately, financial well-being scores generally improved with each successive age group up through the 65-to-74 bracket. After that, however, financial well-being scores started to tail off.

How to stay financially secure in retirement

There are three things you can do if you don't want your financial well-being to peak too early:

  1. Don't retire too soon

    As tempting as it may be to retire early, keep in mind that this challenges your retirement finances in two ways: First, you shorten the time you have to save for retirement and, thus, reduce the size of the nest egg you can build. Second, by lengthening your retirement, you increase the amount you'll need to have saved.

    In short, if you retire early, you are limiting your retirement resources while increasing the amount of money you'll need. You can see why people might feel good about this when they first retire but then start to worry about it more as their retirement years go on and their resources dwindle.

    So, think long and hard about the dangers of retiring too early. Consider, instead, alternatives that may give you a break without completely cutting off your earning power like a second career or working part-time.

  2. Budget retirement spending carefully

    Retirement planning entails dealing with many variables you can't control such as investment returns and inflation. Perhaps the trickiest part of it is that you don't know how long you are going to live. This makes it tough to plan out a sustainable budget because you don't know how many years you are going to have to finance.

    Retirement planning is often built around a life-expectancy assumption based on national averages; but given that roughly half of the people outlive the average age of death, this kind of planning would leave you with a roughly 50/50 chance of outliving your money.

    A safer approach is to budget beyond the average life expectancy. For example, the IRS maintains a table for calculating required minimum distributions (RMD) for people 70 1/2 and older. For a 70-year-old, the table determines that the taxpayer must divide his or her retirement balance by 27.4 and withdraw at least that much each year. If you take that amount or less, you should have money until you're 97 -- assuming that your investments are safe and conservative.

    Another widely touted budgeting guideline is the "4 percent rule." It recommends that you withdraw 4 percent of your total savings each year to safely see you through your lifetime. Several academic studies have shown that you are highly unlikely to run out of money by following this rule. However, other experts recommend dropping to 3 percent when the returns on savings are low.

    Under the 4 percent rule, you could safely withdraw $1,667 per month ($20,000 per year) if you have $500,000 in retirement savings.

    Keep in mind that your retirement savings likely represents just one part of your cash flow. Factor in social security, pension income, other investments and possible proceeds from selling or reverse-mortgaging your home. If you can leave at least one of those sources alone for a few years, the balance that is available to you could increase later.

  3. Adjust to changing information - do an annual retirement checkup

    Ideally, you should use a retirement calculator to help you set up your retirement saving and spending targets. But don't stop there -- you should continue to re-run those calculations periodically, even after retirement.

    Again, retirement planning involves variables you can't control, and you may need to adjust your plan. Re-running retirement calculations and resetting your budget every year helps you adjust to reality. So, for example, if investment returns are less than you expected, this will help you lower your spending accordingly.

    Hunkering down after a bad year can keep you from depleting your resources. You don't want to base your spending on an assumption of constantly higher investment growth. Conversely, if you have an unexpectedly good year, stash some of your windfall in case of leaner times in the future.

The way to avoid having your financial well-being peak too soon is to remember that retirement planning is not simply about planning for the day you retire, but instead it should anticipate your needs throughout the entire length of your retirement.


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