Many Americans fear they will outlive their retirement savings. A GOBankingRates survey found that 66% of Americans are afraid of running out of money in retirement, making it their biggest fear related to entering this stage of life.
The best way to assuage this fear is to be prepared with enough retirement savings and a withdrawal plan that’s optimized for your needs. But how can you know if you’re really in good financial shape? I spoke with financial experts to get their advice on determining whether your retirement income will be enough.
Anjie and RJ of Rich by Intention said the first step to figuring out whether your retirement income will be enough is to know how much your current expenses are.
“Typically, in retirement, your expenses tend to be the same or slightly lower,” they said. “By knowing your numbers, you can then calculate how much you need for retirement.”
Andy Hill, family finance coach at MarriageKidsandMoney.com, said to figure out your “comfortable” annual expenses.
These expenses are “not your lavish annual expenses or your expenses on a year where you’re ‘just going get by,’” he said. “Focus this calculation on a comfortable year.
“After you know how much you’ll potentially want to spend each year, then you can calculate how much income you’ll need,” Hill continued. “For this, you can multiply this comfortable annual expenses number by 25. This comes from the 4% rule, which proposes that you can withdraw 4% of your portfolio in retirement and it’ll potentially last for 30 years.”
For example, if you need $70,000 per year to live comfortably, your retirement investment goal would be $1.75 million.
“There are important considerations, like inflation and taxes, to account for,” Hill said, “but this back-of-the-napkin math can help you get a sense of how you’re doing.”
When considering how much money you will need, it’s also important to consider the lifestyle you want to live in retirement.
“Write down the life you want to live,” said Acquania Escarne, wealth strategist and creator of The Purpose of Money. “Think about how often you want to travel, determine if your home will be paid in full and what other expenses you’ll have in retirement.”
You likely won’t need to fund your entire retirement with your savings, so figure out how much you will receive from Social Security, pensions, annuities or any passive income streams.
“The difference between your current expenses and your [other] income will give your retirement income gap,” Anjie and RJ said. “For example, if your monthly expenses are $3,000 and your Social Security income is $2,000, then you have a $1,000 monthly gap.”
“Run the numbers to figure out the income that your current nest egg will likely generate,” said Bobbi Rebell, CFP, author of “Launching Financial Grownups.” “Then, work backward and run the numbers to generate the realistic target income you want to have. Look at the gap to know where you are and what it will take to get you where you want to be. Having a specific goal will both motivate you and give you essential information you can use to get started filling that gap.”
In addition to creating a savings goal, you also can look for ways to earn more passive income in retirement.
“When the cash flow from your assets exceeds your liabilities, you’re financially free,” said Jaspreet Singh, founder of The Minority Mindset. “You can live your life without worrying about work, and you can retire comfortably. The reason nothing beats cash flow is you don’t have to sell your investments to get paid.
“There are a few ways to generate this type of cash flow, [including] stock dividends, real estate rental income, royalties and business profit distributions,” he added. “It takes time to build this type of consistent cash flow, but it is possible if you stay consistent with your investments.”
One of the best ways to determine whether you have enough savings and other sources of income to get you through retirement is to make use of online retirement calculators.
“You’ll need to include how much you’ve saved and how much you plan on saving and investing before retirement,” said Barbara Friedberg, owner of Barbara Friedberg Personal Finance. “You’ll also want to decide at what age you’ll stop working and approximate how much you expect to spend in retirement.”
“Let’s face it: If you’re wondering if you have enough money for retirement, you probably do not,” said Rob Frohwein, CEO of Keep Financial. “Don’t sweat it though — it’s not too late. The key is to convert more of your salary into lump sum payments.
“While small incremental salary adjustments can help you retire if you start early enough (in your 20s and 30s), when it’s later in the game, think about seeking more income in the form of lump sum bonuses, perhaps tied to your continued retention with your employer. Better yet, ask for these bonuses to vest in an accelerated fashion if you meet company goals sooner. And, when you do, ask for another bonus — rinse and repeat!”
Use these bonuses — and any other additional income you can set aside — to increase your savings rate.
“Saving at least 15% of your income each year can be very meaningful,” said Toni Brown, head of retirement strategy at Capital Group.
Also, look for ways to optimize your retirement savings fund.
Brown said, “Investing in your plan’s Qualified Default Investment Alternative (QDIA) — usually a target date fund — is a professionally managed option that is likely to serve you well over time.”
Gabrielle Olya contributed to the reporting for this article.
