How to Make Sure You Don't Run Out of Money in Retirement
As you look towards your retirement, it’s normal to have worries about the unknown.
There are many risks you must try and navigate as you stop living paycheck to paycheck and rely on what you’ve saved during your working years.
The biggest concerns retirees often have include: market risk, health risk, interest rate risk, withdrawal rate risk, tax risk and longevity risk.
Today, we’re going to focus on longevity risk.
You can break down your retirement savings life cycle into three phases: Accumulation, Protection and Distribution.
In the accumulation phase, you typically receive a steady paycheck every two weeks and are saving a percentage of your income in your TSP and other savings vehicles.
The TSP is a great accumulation vehicle for a few reasons.
- You receive a match of 5% (if a FERS employee)
- You can choose funds based on your risk tolerance
- There are lifecycle funds available for your target retirement date
- It’s extremely low-fee
Ultimately, you are “accumulating” money that you will use for living expenses once you reach retirement.
Next comes the Preservation stage.
You’ve worked hard your entire life.
You want to ensure that you don’t lose any of that hard earned capital.
We’ve seen over the last few months how quickly the market can drop 30% – which makes the preservation stage that much more important. This is especially true if you are nearing retirement — you simply don’t have time on your side to recoup the losses without taking on a ton of risk.
As you get closer to your retirement date, surveys show that most retirees want to move their money into safe assets that have protection from downside market risk while also having an opportunity for growth.
Finally, is the distribution stage.
You want to distribute your money in an efficient way, and try to make it last as long as possible.
This is where longevity risk comes into play.
You want to make sure you don’t run out of money.
No one wants to have to depend on others in their last few years.
But good news, there are steps you can take to prevent that.
First, Social Security. Social Security is guaranteed for as long as you live if you’re eligible to receive it.
Also, most pensions will pay a fixed amount until you pass away.
It also makes sense to draw down money in the correct way out of your TSP and other retirement accounts, while limiting taxes.
For example, if you pull too much money out of your IRA in a certain year, you could end up having your social security benefit taxed.
There are also other vehicles, including fixed indexed annuities that allow you to receive a guaranteed paycheck for life.
These vehicles allow you to be protected from the downside risk of the market, and you have the ability to participate in the market when it goes up.
These plans can also give you a paycheck for life.
All of these together, when maximized, will give you the best chance at beating longevity risk and not running out of money in retirement.
Our federal benefit experts have extensive training when it comes to federal benefits, Social Security optimization and retirement income planning.
We can guide you every step of the way.
Please reach out if you’d like to learn more.
-Your Friends at GPIS
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