10 Ways to Ensure Your Retirement Savings Last
Thursday, June 26, 2014

A big financial challenge retirees face is ensuring their savings last the rest of their lives. It’s a daunting task for those making the transition into retirement as well as for those already in retirement. While saving as much as possible during your working years is important, the decisions you make in retirement are also very important. Fortunately, there are steps you can take to improve your odds of financial success. Here are 10 of them.

1. Withdraw a Safe Amount—Limiting the size of withdrawals from your retirement savings is critical for ensuring your portfolio lasts throughout your lifetime. William Bengen calculated a 4% withdrawal rate, adjusted upward annually to account for inflation, as having a very high probability of ensuring a retiree will not run out of money. You may be able to sustain a higher withdrawal rate, but the risks of running out of money will increase as well. Even bumping the withdrawal rate to 5% comes with some increased risks, though going above this level significantly increases the risk of a shortfall.

2. Allow for Variability in Your Spending—The 4% withdrawal rate is a good benchmark for determining how much to withdraw, but it’s just a benchmark. During good years for the market, you may be able to withdraw much more from your retirement savings; during bad years, much less. You will also have years when your spending is elevated (vacations, home repairs, medical bills, etc.) and years when your spending is lower. By allowing for variability in your spending, you can help to offset the blow taken from the years with bad market conditions or high spending.

3. Be Cognizant of Longevity Risk—Longevity risk is the probability of outliving your savings. The Social Security Administration estimates a 25% chance of a person turning 65 today living past age 90 and a 10% chance of living past age 95. (The average life expectancy is 84 for a man and 86 for a woman.) These numbers mean a person retiring today could potentially be looking at living off of his or her retirement savings for at least 25 or 30 years.

4. Be Cognizant of Inflation Risk—Inflation erodes purchasing power, which is your ability to buy goods and services for the same dollar amount. Just as bread costs more now than it did 20 years ago, it will cost even more 20 years in the future. Inflation risk is one of the key reasons why it is important to think about growing your wealth even after you have retired.

5. Maintain an Exposure to Stocks—A common misperception we hear involves how conservative a portfolio should be in retirement. Though a retiree dependent on portfolio withdrawals should have a more conservative allocation than a 25-year-old, the retiree should maintain a significant allocation to stocks. Opinions vary on how significant the equity allocation should be, but if you want to offset longevity and inflation risk, you need to keep investing in stocks. Our conservative portfolio allocation model suggests a 50% exposure to stocks for those 55 and older. This said, the best allocation for you is dependent on your age, health, wealth, goals and your psychological ability to tolerate market volatility.

6. Touch That Principal—The concept of “never touch principal” may sound good in theory, but is difficult to follow in a low-yield environment. It can even lead to riskier investing decisions if investments are primarily selected on the basis of absolute yield. Furthermore, if your assets are rising in value, you will have capital gains to help fund your retirement withdrawals. A good compromise solution can be to rely on portfolio income first and then supplement it with capital gains. Realize that you saved your whole life so you can have money to spend in retirement.

7. Delay Claiming Social Security—Postponing the date at which Social Security is claimed until age 70 will maximize your lifetime benefits if you live past age 80. If you live into your 90s or 100s, the difference in cumulative benefits will be significant.

8. Get a Job—Working in retirement will provide extra income. The salary can, in turn, help you withdraw less from your retirement savings. There are also studies linking employment to longer lifespans. Plus, if you are past full retirement age, your Social Security benefits will not be reduced. A greater proportion of your benefits could be taxed, but the gross amount paid by the Social Security Administration won’t be reduced. (Full retirement age is 66 for people born between 1943 and 1954. It increases by two months per year thereafter to 67 for someone born in 1960 or later.)

9. Pay a Company to Cover Your Risks—While you cannot forecast future medical care costs or your longevity risk with certainty, you can pass along these risks to a corporation. Annuities can guarantee a stream of income until you die, no matter how long you live. Long-term care insurance will help cover expenses related to daily living activities (e.g., bathing, eating, continence, etc.) when you are medically no longer able to handle those tasks yourself. A life insurance policy can ensure there is money to pass along to your heirs.

10. Live Very Well—A healthy diet, exercise, engaging in mentally challenging activities, avoiding risky activities and generally using moderation have been shown to help maintain good health. Ignore this advice and you will risk shortening your lifespan, which in turn would mean not needing your savings to last as long.

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The Week Ahead

The U.S. financial markets will be closed Friday for Independence Day.

Only two members of the S&P 500 will report earnings next week: Paychex (PAYX) on Tuesday and Constellation Brands (STZ) on Wednesday.

The first economic reports will be released on Monday: the June Chicago PMI and May pending home sales. The June PMI manufacturing index, the ISM’s June manufacturing index and May construction spending will be released on Tuesday. Wednesday will feature May factory orders. May international trade data and the June ISM non-manufacturing index will be released on Thursday.

San Francisco Federal Reserve president John Williams will speak on Monday and Federal Reserve Chair Janet Yellen will speak on Wednesday.

July has ranks fifth in terms of returns for the Dow Jones industrial average and the S&P 500 during midterm election years since 1950, according to the Stock Trader’s Almanac. Historically, it’s been a bumpy month for the NASDAQ and the Russell 2000, however, ranking 11th (since 1974) and 12th (since 1982), respectively.

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AAII Sentiment Survey

Pessimism among individual investors is now at a six-month low, according to the latest AAII Sentiment Survey. Neutral sentiment remains at an unusually high level, while optimism is slightly below its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.0 percentage points to 37.2%. The rebound is not big enough to keep optimism from being below its historical average of 39.0% for the 13th time in the past 15 weeks, however.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.0 percentage points to 41.7%. This is the seventh time in nine weeks that neutral sentiment is above 40%. Neutral sentiment is also above its historical average of 30.5% for the 25th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.0 percentage points to 21.1%. This is the lowest level of pessimism registered in our survey since December 26, 2013 (18.5%). The decline keeps bearish sentiment below its historical average of 30.5% for the 10th straight week and the 33rd out of the last 37 weeks.

Despite hitting a six-month low, bearish sentiment remains within its typical range. It is near the bottom of the typical range, however. Historically, unusually low levels of bearish sentiment have been followed by only slightly weaker-than-average market performance (an average 26-week return of 4.0% for the S&P 500 versus 4.4% for all weeks since September 1987).

Neutral sentiment is above its typical range (more than one standard deviation above average) for the second consecutive week. Historically, unusually high levels of neutral sentiment have been followed by better-than-average S&P 500 returns (an average six-month gain of 7.2%). The historical results of unusually high and low AAII Sentiment readings can found in this month's AAII Journal.

The ongoing streak of 25 consecutive weeks with neutral sentiment readings above 30.5% is the fourth-longest in the survey's history. The only longer such streaks were an 82-week stretch in 1987 and 1988, a 65-week stretch in 1997 and 1998 and a 28-week stretch in 1993.

This week's special question asked AAII members what factors are most influencing their six-month outlook for stocks. Several members listed more than one factor. The economy topped the list, named by 28% of respondents. Many of them (17% of all respondents) cited sustained growth or expectations for continued growth. The market was a very close second, named by slightly more than 27% of all respondents. About 9% of all respondents said valuations were high, though there were others who were encouraged by the market's resiliency and upward momentum. The geopolitical picture, especially Iraq and Russia, was cited by just fewer than 17% of all respondents. Frustration with politics also remained a common refrain, with 13% of respondents expressing displeasure with either political infighting or the president's policies.

This week’s Sentiment Survey results:

Bullish: 37.2%, up 2.0 points
Neutral: 41.7%, up 1.0 points
Bearish: 21.1%, down 3.0 points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

Take the Sentiment Survey.