Are you worried about PlanGap ™?
How much money will you have saved when you reach retirement?
How will you achieve this goal?
The three keys to successful retirement savings are money, time and compounding interest.
How much money will I need in order to avoid PlanGap ™?
In order to factor how long your savings will last, pull together the following information:
- How much you currently have in savings
- The interest your current savings is earning
- How much you’ll plan to spend each month from your savings accounts
- If you’ll have any other forms of income (such as social security)
How To Make Your Savings Last “Forever”
The 4% Rule
The gold standard in financial planning is to only take out what will be replaced through earnings, that way your money will last “Forever.” Here is a description of how it can work from retirementinsurance.org
In 1994, Financial Advisor, William Bengen found that if you invest at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years. To arrive at this conclusion, Bengen tested his theory across some of the worst financial markets in U.S. history (such as the Great Depression), and found that 4% was the safe withdrawal rate.
He revised his work in 2006 to 4.5% if tax-free and 4.1% for taxable.
How To Save Using The 4% Rule
The method is easy: You take out 4% out of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment.
For example, Let’s say you expect to need $5,000 a month in retirement income, and that Social Security will provide $1,500 in benefits. This means you’ll need to withdraw $3,500 a month from savings, or $42,000 per year. If you multiply $42,000 by 25 (or the number of years you want to have saved for retirement), you’ll get $1.05 million, which is the savings target you should aim for.
Saving for Retirement – The Income Floor Strategy
The income floor strategy is based upon guaranteed income only. Many seniors obtain this type of income from Social Security, pensions, annuities or other defined benefits. Attempt to limit your monthly bills and other essential expenses to just your guaranteed income. Then, let your invested savings be used for the fun and discretionary expenses. This method helps you feel confident that your basic needs will always be covered.
The challenge with this method is what do you do if one of your “guaranteed” income streams gets disrupted? Broken promises can wreck havoc on your retirement plans. If that happens, you may want to consider a PlanGap™ policy that can help when your retirement income can no longer satisfy your retirement plan.
Final Thoughts on PlanGap ™
Whatever plan you choose, just remember that “The best time to plant a tree is 20 years ago, the second best time is today!”
Looking for a bank that will pay you well for holding your savings? Check out our article on Marcus: By Goldman Sachs
Richard received his Master of Accountancy (MAcc) in 1998 and is a licensed Certified Public Accountant (CPA). He is the Senior Editor for BankProfessor.com