That’s an understandable concern, but one that can be addressed.
Think tank proposes capping Social Security benefits at $100,000
A Washington think tank has proposed capping annual Social Security benefits for married couples at $100,000 as a way to reduce a looming deficit in retirement trust funds.
If you’re trying to save up a lot of money and move into retirement, give yourself a pat on the back. Many seniors are unable to take their retirement savings with them and must live mostly on Social Security.
But the last thing you want to do after working hard and amassing a large IRA or 401(k) balance is to watch your retirement savings slowly evaporate. Here are some important steps you can take to significantly reduce that risk.
1. Don’t prioritize spending
Many of your expenses may remain the same after you retire from your working life. But with your newfound free time, you may find yourself spending more on things like leisure and travel.
That’s not necessarily a bad thing. However, it’s important to keep track of your expenses and create a budget to avoid overspending. Your budget should account for planned expenses, recurring expenses, discretionary expenses, and one-time expenses such as insurance premiums that you only pay once a year.
2. Rely on profitable growth investments
If you want your retirement savings to last, you need to invest a significant portion of your money in assets that outperform inflation. To that end, you won’t want to let go of growth stocks or exchange-traded funds (ETFs), even if they involve risks.
Many retirees maintain a 40%/60% mix of bonds and stocks in their portfolios. You may want to consider keeping at least a third of your stock portion invested in your growth vehicle.
For the rest of your stock portfolio, focus on stocks or ETFs with high dividend yields. The more income your portfolio generates, the more sustainable your portfolio is likely to be.
3. Create a withdrawal strategy that works for you
Even if you can retire with a multi-million dollar IRA or 401(k), it’s important to be careful not to withdraw too much money at any point. To do this, come up with an exit strategy based on your spending needs, traditional goals, and external sources of income.
For example, let’s say you want $120,000 a year to live comfortably. But if Social Security provides $50,000 of that, it takes some of the pressure off your savings.
Similarly, you might be able to afford to withdraw $150,000 per year. But if you want to leave a legacy, you may want to specifically limit the amount you can withdraw each year, especially if you think not leaving a legacy is just as bad as running out of funds.
4. Be prepared to be flexible.
If the stock market declines and the value of your investments declines, you are at significant risk of permanent losses and, ultimately, depletion of your funds. To avoid being hurt by market downturns in retirement, adopt a flexible mindset.
In most cases, that means cutting back on spending during market downturns or working part-time to minimize savings while waiting for a recovery. If you’re open to either option, it could be the difference between draining your savings and keeping your IRA or 401(k) intact.
5. Maintain cache buffers
Another great way to avoid having to sell your portfolio investments at a loss is to maintain a strong cash cushion. If you have the funds to cover your needs during market downturns, you won’t have to sell your investments when they drop in value.
The amount of cash you keep on hand should be determined by your income needs and willingness to work and reduce expenses if necessary. If you’re unable to work and feel like you can only afford to cut your expenses by 5% to 10% during a recession, it may be a good idea to keep two to three years’ worth of living expenses in cash.
The thought of running out of money in retirement is scary, especially if you’ve worked hard to save up your money. However, by following these steps, you can significantly reduce that risk and have more peace of mind.
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