How to Ensure Your Savings Last as Long as You Do

PLANNING FOR TOMORROW:

Navigating Longevity Risk in Retirement

How to Ensure Your Savings Last as Long as You Do

It’s a common fear.  Will I run out of money after I retire?

People keep working longer so that they will have more income when they retire.  Social Security benefits tend to be higher.  For some people working longer may increase their retirement or pension benefits, although many companies are ceasing to allow pensions to increase.

People want their nest egg to keep growing.  It needs to keep up with inflation.

For some people, they will end up spending down their nest egg.

We might have an idea of our life expectancy, but we need to be prepared to live longer.

Pete once bought a house from a man who was 62 years old.  The seller financed it for him with 30 years of payments.  The seller did not expect to live to age 92 and figured the payments would go to his heirs after he passed.  Thirty years later Pete made the last monthly payment to the seller.  The monthly income stream just ran out for the seller.

As one of my favorite real estate teachers Peter Fortunato said,

“It is a terrible thing to be physically alive and financially dead.”

How can we prepare ourselves and alleviate that fear?

Here are 5 steps.

ONE. Define your life for tomorrow.

What do you want your life to look like when you retire?  Or when you are financially free?

Do you plan to travel more?

Do you want to work part time?  Or have total freedom of time?

Are you just trying to survive? Or planning on a life of adventures?

Are there hobbies that you want to pursue?

Write down what each of these will cost.  Some will be monthly, others may be a one-time bucket list trip or something that you save for regularly.

TWO. Recognize all potential sources of income.

Many people have multiple sources of income.  They might include IRAs, 401(k)s or other retirement accounts.  There might be Investments outside retirement accounts.

Be sure to include Social Security and any expected pension income.

If married, know how some sources of income may change with the loss of a spouse.  Plan for this change.  For example, when one spouse passes, the total Social Security payments will be reduced.  Pension income for a surviving spouse may also be lower.

Are you planning to have a side gig or part time work in retirement?  Consider using this to supplement other income rather than relying on it.  An injury or unexpected change in health conditions can render one unable to work.

THREE. Track Income, Expenses and Net Worth

Track your income, expenses and net worth on a regular basis.  Net worth can be determined less often, but know where you are.

Identify which expenses are fixed and which are discretionary.  The discretionary expenses can be reduced if times get tough.  Fixed expenses can include items such as a house payment, utilities, and groceries as they are necessary.  Discretionary expenses may include things that you can get by without, such as eating out or daily $7 coffee.  A vacation may get postponed or taken with a smaller budget.

I like to use a Personal Financial Statement similar to that used in the Cash Flow Game ® by Robert Kiyosaki.  It was created using Excel so that everything adds up quickly and we can compare changes month to month.

Tracking these monthly helped provide my wife with some sense of security when I retired.  She wanted to know where the money was coming from. 

FOUR. Determine how large your nest egg needs to be.

The good news is that your nest egg may not have to fully fund your desired lifestyle.

Add up all of the income that will be available from passive sources, those which you do not have to continue working for.

Did you include income from a retirement account or real estate?  As a rule of thumb, I like to use a 5% withdrawal rate for retirement accounts and 5-6% for real estate.  This is for planning purposes.  The stock market return averages 9 to 10 percent annually.  The withdrawal rates allow for inflation between 3 and 4 percent and a little margin.  Leveraged real estate returns tend to be higher than the stock market and have a built-in hedge against inflation.

Next add up your anticipated expenses.

Look at your current spending and adjust it for anticipated changes, including inflation.  You will not need to keep investing for retirement.  Saving for kid’s college expenses and weddings could be behind you.  Maybe your house will be paid off.  But you might want to significantly increase your budget for travel or other hobbies.  And remember to account for taxes.

Now compare your expected passive income with your anticipated expenses.

Is the expected income higher than anticipated expenses?  Congrats!  You are on track to ensure your savings last as long as you do.

If the anticipated expenses are higher than the expected income, then take the monthly difference and multiply by 12 to determine how much more passive income you need each year.  Then multiply that number by 20 to see how much larger your portfolio needs to be to provide that income.  For example, if you need another $1,000 per month, multiply by 12 and get $12,000 per year.  Then $12,000 x 20 = $240,000.  And a 5-percent withdrawal rate from $240,000 is $12,000.  Again, this is a rule of thumb.

The difference might seem large.  If so, then it may be time to make tough choices.  You can choose to spend less and invest more.  You can earn more and invest more.  You can continue working and growing the portfolio.  Be sure to track your progress as it can provide encouragement over time.

FIVE.  Optimize your investment portfolio

During our early years of investing we tend to focus on accumulating wealth.  We seek to grow our nest egg.  Any cash flow and distributions get reinvested.  As we approach retirement we need cash flow.  We start shifting the emphasis from accumulating to providing cash flow while still preserving our capital.

One of the most common ways promoted to achieve this is saving in a 401(k), investing in the stock market, and then withdrawing funds starting at retirement.  If this is done with a traditional retirement account (not a Roth) then distributions are taxed at your ordinary income tax rates.

An alternative which I favor is investing in multi-family partnerships, or syndications.  Some pay a  regular distribution, helping to satisfy the cash flow needs of a desired lifestyle.  These partnerships tend to have higher overall returns and many provide a regular cash distribution.  This can give the desired cash flow while using leveraged real estate to maintain growth.  

Multi-family partnerships also have better tax benefits than traditional retirement accounts.  Some of the income is taxed at ordinary income tax rates, while other income is taxed at lower long term capital gains tax rates.  Depreciation allowance can also significantly reduce the amount of income that is taxed.

Investments can also be made in multi-family syndications from within retirement accounts.  However, not all plan providers allow this.  

If you wish to hold real estate interests within a retirement account you need to have the funds placed with a custodian than allows it.  I’ve been doing this for over ten years and the assets provide a good source of cash flow.

FINAL THOUGHTS

When planning for the future we want to ensure we won’t run out of money.  We might live longer than expected.  We also have some control and can increase our odds of staying financially alive.

We can increase income in the years that we are growing our portfolio.  We can eliminate or reduce some expenses.  And we can optimize the portfolio over time so that it provides more cash flow when we desire it while maintaining an edge over inflation.

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