In the past 50 years, life expectancy has increased by more than ten years. That's ten additional years that you must save for your retirement. Some may argue the best method to save enough is to find a job you like and work longer than you need to. However, nearly 55% of American’s stop working sooner than planned (Motley Fool).
On top of that, only 60% of workers are actively saving for their retirement (Motley Fool).
So, how should you aim to make your retirement savings last as long as you need it?
When investing for retirement you have a couple options.
Your first option is buying fixed-income investments (i.e. CDs, bonds, or money market or savings accounts). These pay a fixed rate of return and feel good in retirement because they are a lot less volatile. They also provide a steadier stream of income, despite the relatively low return.
On the other hand, you have the stock market. The stock market is much more volatile than the bond market, but the trade-off is much more account value fluctuation.
That’s where retirement planning is tricky.
If you knew you would have a very short retirement, you could be very conservative knowing you won’t outlive your assets. However, once life expectancy starts creeping up to 75-80, 85-90, you’re forced to take a more balanced approach.
Another thing you must take into consideration is inflation and the decrease in buying power. As the years progress and inflation rises, your dollar won’t go as far as it once did.
Life Expectancy from Birth
Life expectancy is increasing, but the number you hear about is generally the life expectancy from birth. Once your life progresses, so does your life expectancy, which is something else you have to account for.
From birth, your life expectancy may be 77, but once you turn 65, you can expect to live (on average) 17 more years.
The Bucketing Strategy
In a bucketing strategy, we address the fact that we need money in the short term, that will be safe.
What we do in the bucketing strategy, is take three years of your income needs and make it very safe and very accessible. Now, if the stock market drops, you can feel confident at night knowing you have that money safely set aside.
The second bucket we look at is the money you need in three to seven years. This money will be invested with an income strategy.
Anything you don’t need for seven plus years, is where we begin to look at a growth bucket. This money is invested more aggressively, knowing you won’t need it until further down the road. This third bucket is how we strive to make sure to keep up with inflation.
When you’re heading into retirement, it’s important that you have both of these questions answered:
- Do I have enough money saved?
- Am I keeping up with inflation?
Answer both of those questions and you should feel confident. Before retirement, speak with a professional who can help you strive to make sure your money lasts well into your golden years.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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