After spending a lifetime trying to save enough money to help ensure a financially secure retirement, your main financial strategy once you enter retirement will shift drastically: from wealth accumulation to wealth preservation and, to some extent, decumulation to meet your retirement spending needs. At this point in your life, your primary objective is to ensure your retirement assets last for as long as you live — or in other words, to make sure that you don’t outlive your money.
This has become even more challenging due to a number of factors, such as the current low interest rate environment, rising healthcare costs and inflation, and longer lifespans. For example, a 65-year-old man today will live to age 84 on average while a 65-year-old woman today will live on average to age 86. If this couple retired at age 65, their retirement assets would need to last at least 20 years.
One way to meet this challenge is to generate more income during your retirement years. Here are a few strategies for accomplishing this.
1. Allocate Your Assets Appropriately
Retirees are often advised to shift to a more conservative approach with their asset allocation once they enter retirement. But this ignores the fact that retirement could last for two decades or longer. One of the greatest, as well as often overlooked, risks to a retirement plan is loss of purchasing power. This can happen if your savings are invested too conservatively and you do not earn a high enough return to outpace inflation.
It is still important to have an appropriate amount of cash available, so we typically recommend keeping three to six months of living expenses in cash. For retirees or those retiring in the near future, you may want to have up to one years worth of expenses in cash. Then, invest your retirement portfolio in a globally-diversified allocation that minimizes risk for an acceptable level of return. Be wary of general rules of thumb, such as allocating your portfolio to the same percentage of bonds as your age. These rules are not personal to you and your retirement goals!
2. Devise an Asset Withdrawal Strategy
Plan strategically for how you will draw down your retirement assets. One common strategy is known as the “4% rule.” Here, you will withdraw no more than 4% of your total retirement assets during the first year of retirement and then adjust this based on inflation each year thereafter. For example, if you have a $1 million retirement portfolio, you would withdraw $40,000 to meet your living expenses the first year. If the annual inflation rate is 2%, you would then withdraw $40,800 the second year, and so forth for subsequent years.
The 4% rule is based on historical market returns for a portfolio that’s allocated 50-50 between stocks and bonds and it assumes a retirement lasting 30 years. Keep in mind, however, that it’s just a rule of thumb and isn’t appropriate for every retiree in every situation. For example, if you retire early, you might need to adjust the 4% downward to accommodate a potentially longer retirement. You also might need to adjust it downward if there is a major market downturn soon after you retire that puts a significant dent in your portfolio.
On the other hand, if you delay your retirement — such as by working until you’re 70 years of age or over — you might be able to withdraw more than 4% of your assets each year once you do retire. Not only will you stay in the asset accumulation stage for longer, which will give you more time to continue saving for retirement, but you could end up spending fewer years in retirement.
3. Consider Waiting as Long as Possible to Start Tapping Social Security Benefits
There’s an eight-year window for claiming Social Security benefits: You can start receiving benefits as early as age 62 or wait until you turn 70. The longer you wait, the larger your monthly benefit will be. Specifically, if you start receiving benefits before you reach full retirement age (or FRA), your monthly benefit will be smaller than if you wait until you reach full retirement age or later.
So what’s your full retirement age? It depends when you were born: If you were born in 1960 or later, your FRA is 67. If you were born between 1938 and 1959, your FRA is 66. And if you were born before 1938, your FRA is 65.
If you start receiving Social Security any time before you reach FRA, your monthly benefit will be approximately 8 percent smaller than if you wait until full retirement. However, if you wait until after you reach FRA, your monthly benefit will be approximately 8 percent higher. This extra benefit accrues until you turn 70, so there’s no reason wait any longer than this to receive Social Security benefits.
Note that these benefit reductions and increases are permanent. In other words, you will receive an 8 percent smaller or larger Social Security payment for the rest of your life once you start receiving benefits. So be sure to plan carefully and make sure you choose the right Social Security distribution strategy for you based on factors such as your life expectancy, other retirement assets and when you actually need the money to meet your retirement living expenses.
4. Work Part-Time After You Retire
The idea of retiring and never working again has been challenged by many retirees in recent years who have no desire to completely leave the workforce. These people enjoy continuing to work in some capacity, albeit less than full-time. Doing so helps keep them busy and keep their minds sharp while also generating extra income to help pay living expenses in retirement.
For example, you could look for a part-time job doing something you enjoy, such as working at a local garden center, park or library. Or you might use the skills and connections you built up over your career to do consulting or freelance work on a part-time basis. An accountant, for example, could take on a handful of clients and help them prepare their tax returns during the busy tax season.
There are several potential benefits to working part-time in retirement. This starts, of course, with generating extra retirement income, which could help your retirement savings last longer and allow you to delay claiming Social Security benefits. It can also boost mental health by helping some retirees avoid boredom and even depression, as well as make it easier to make social connections in the workplace.
Suggested Next Steps for You
Before deciding to retire, use the Personal Capital Retirement Planner to see where you stand. And consider talking to a fiduciary financial advisor to make sure you have the resources to meet your goals in this next chapter of life.