Will You Outlive Your Retirement Savings?

Your nest egg needs to sustain you throughout retirement.  Here's how to make sure it does! 

Of the various things today's older workers might fear — losing their jobs, needing to quit due to health issues, and so forth — there's perhaps no prospect more terrifying than the notion of outliving their savings. In fact, 60% of Baby Boomers claim they're more worried about running out of money in retirement than actually dying.

Sadly, it's a valid concern, especially since countless older Americans are also considerably behind on savings. The Economic Policy Institute reports that the median savings balance among workers ages 56 to 61 is a mere $17,000 — hardly enough to live off even with Social Security factored into the mix.

If you're concerned about outliving your savings, then you'll need to be proactive in avoiding that fate. And there are steps you can take to improve your long-term financial picture. First, however, you'll need to assess your personal risk, which you can do by asking yourself the following questions:  

1. Have I been saving 15% or more of my income?

It used to be the case that to retire comfortably, you'd need to set aside 10% of your earnings over time. Not anymore. Given the way health care and other costs have inflated in recent years, you'll need to do better if you want enough money to cover the bills for the long haul. That's why workers today really need to set aside 15% or more of their income for the future.

If you've been saving at that level, or somewhere in the vicinity, then you're probably in pretty good shape. Similarly, if you haven't been saving that much, but are still relatively young with many working years ahead of you, there's a good chance you'll come out just fine if you ramp up immediately. But if you're already in your mid- to late 50s and haven't been hitting that threshold, there's a strong chance you'll run out of money at some point if you don't take steps to compensate.

How do you do that? It's simple: Work longer, and max out your savings for as many years as you can. If your original goal was to retire at 65 and you push yourself to work until 70, all the while maxing out your 401(k) during that five-year period, you'll have an extra $122,500 to play with in retirement — and that assumes zero investment growth. Not only will extending your career offer you an opportunity to save more, but it'll also help you avoid dipping into your existing savings for however many years you remain on the job.

Another option: Continue working in retirement, albeit on a part-time basis. You can approach your long-term employer about a partial retirement, or pursue something new if you can't bear to keep plugging away at your current job any longer. The key is to generate enough income to avoid depleting your nest egg prematurely.

2. How much of my savings do I plan to withdraw each year?

The key to stretching your nest egg is knowing how much of it you can afford to withdraw annually during retirement. For years, experts have lauded the 4% rule as a solid withdrawal strategy, since the rule is designed to make your savings last for up to 30 years — but unless you fit very specific criteria, withdrawing that much of your savings each year could cause you to deplete your reserves sooner than expected.

The problem with the 4% rule is that it makes certain assumptions about your portfolio and its growth potential. One is that you still have more than half of your assets in stocks, and that your bonds generate a respectable level of income. But what if you unloaded most of your stocks in an effort to lower your risk? Suddenly, that formula is thrown way off. Similarly, bonds today pay considerably less than they did back when the rule was established. So today's retirees need to adjust their withdrawal strategies accordingly.

What should you do? Use the 4% rule as a starting point, but develop a withdrawal plan that better aligns with your circumstances. For example, if you're heavily invested in bonds, and they aren't paying much interest, start out by withdrawing 2% of your nest egg rather than 4%. Being conservative with your withdrawals will help sustain your nest egg, so it's there for you throughout retirement.

3. Am I underestimating my life expectancy?

Many seniors plan for something in the ballpark of a 20-year retirement, but for some folks, that's a dangerously low estimate. That's because one out of every four 65-year-olds today will live past the age of 90, while one in 10 will live past 95. If you're one of them, yet you retire in your mid-60s, you could easily end up in a situation where you run out of money with several years of retirement left ahead of you.

A better bet? Assess your health, and if it's relatively strong, assume the best when it comes to your lifespan. If you operate under the assumption that you'll live until 90 and pass away at 88, you'll have a little something left over to leave to your heirs. And that's a much more ideal scenario than spending down your savings and burdening your family with your bills in your late 80s — assuming you even have that option, which many seniors don't.

If there's one risk you can't afford to take as a senior, it's outliving your savings and scrambling in your old age. So don't put yourself in that situation. Assess your personal risk early on, and take steps to compensate. Otherwise, you could end up falling victim to the fate that's so many retirees' worst nightmare.

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Home Equity Gives Seniors Financial Leverage

Housing wealth for older homeowners is on the rise nationally, giving them a source of money for late-in-life expenses, according to a mortgage industry group.

The National Reverse Mortgage Lenders Association reported Sept. 29 that homeowners age 62 and older saw their home equity increase by a combined 2.4 percent to $6.42 trillion in the second quarter of 2017.

According to the association NRMLA, the growth in housing wealth for retirement-age homeowners was driven by an $162 billion boost in senior home values and offset by a 0.8 percent increase of senior-held mortgage debt that equaled $12 billion. The quarterly measurement of home equity rose to its higheset level since 2000.

“It is unclear whether Congress and the president will come to an agreement on healthcare reform this year, but there is little doubt that healthcare spending per person will continue to increase. This is a particularly sobering fact for older Americans who can expect to spend between $200,000 to $400,000 out- of-pocket for medical expenses during retirement,” said NRMLA chief executive officer Peter Bell. “The question for them right now is not whether the Senate can pass a bill, but how are they going to pay for the financial shocks of aging? Housing wealth provides older homeowners with an available source of funds to manage the costs of caregiving and other expenses incurred in the last third of life.”

A 2015 research paper from Ohio State University (“Aging in Place: Analyzing the Use of Reverse Mortgages to Preserve Independent Living”) shows that 14 percent of reverse mortgage borrowers took out the loan with the intention of using the proceeds to pay ongoing health or disability expenses. An example, according to NRMLA, ia couple in Maine who used reverse mortgage loan proceeds to pay off aging medical bills, help their adult son, and supplement retirement savings.

The National Reverse Mortgage Lenders Association (nrmlaonline.org) represents the lenders, loan servicers and housing counseling agencies responsible for more than 90 percent of reverse mortgage transactions in the U.S.

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Boost Retirement Income with Home Equity

Using home equity to enhance retirement income planning is an emerging topic in financial planning.

When I address consumer groups and conferences for financial professionals all around the country, I note that the traditional three-legged stool of retirement security–which traditionally has relied on pensions, personal savings and Social Security–is broken. Many Americans have not accumulated enough savings to support a retirement that could last 30 years or more.

I offer an alternative analogy of a retirement income pyramid that relies on Social Security and retirement savings as a solid base, augmented by additional layers that tap home equity, assume part-time employment and incorporate other sources of income, if necessary, such as inheritances, brokerage accounts and income-producing assets.

New research by Peter Neuwirth, Barry Sacks and Stephen Sacks published in the October issue of the Journal of Financial Planning documents how including home equity in the form of a reverse mortgage, with retirement savings, can maximize retirement income while minimizing the probability of exhausting all assets before the end of retirement.

ALTERNATIVE STRATEGY

In the article, "Integrating Home Equity and Retirement Savings through the Rule of 30", the authors suggest that this new approach could serve as an alternative to the 4% rule of thumb that financial advisers have used for decades. The 4% rule, first developed by financial planner William Bengen in 1994, is based on the theory that if a retiree restricts his or her initial withdrawals to 4% of their portfolio in the first year of retirement, and increases annual withdrawals to account for inflation, their savings should last for 30 years or more.

But steep market declines during the financial crisis of 2007- 2009, which coincided with the first few years of retirement for millions of Baby Boomers, threw that theory into question as steep losses early in retirement decimated their portfolios, leaving many retirees with insufficient assets to benefit from subsequent market recoveries.

The new research demonstrates that the appropriate dollar amount of the initial withdrawal for any given total amount of retirement savings plus home value at the outset of retirement turned out to be 1/30 of that combined amount for a broad range of retirees. The research assumes the portfolio is invested 60% in equities and 40% in bonds.

The analysis is based on retirees using a coordinated strategy of establishing a reverse mortgage credit line at the outset of retirement and drawing income from the portfolio in the first year of retirement equal to 1/30 of total retirement income resources (portfolio and home equity). If the portfolio performance is positive, the next year's income would be withdrawn from the portfolio. If the performance is negative, the ensuing year's income would be withdrawn from the reverse mortgage credit line.

"The dollar amount of the initial withdrawal that resulted in an approximately 90% probability of cash flow survival was the same across a broad range of ratios of home value to initial value of retirement saving portfolio," the article found.

The research tested the hypothesis against four profiles of retirees, including mass-affluent retirees with a home value of about $400,000 and a portfolio of retirement savings of $800,000; house rich, mass-affluent retirees with a home value of $800,000 and a retirement savings of $400,000; the almost-affluent retiree with a home value of $150,000 and total retirement savings of $300,000; and the house-rich, almost affluent retirees with a home value of $300,000 and a retirement portfolio of $150,000.

"FORGOTTEN ASSET"

"Home equity has been the forgotten asset of retirement planning for years," said Jamie Hopkins, co-director of the Center for Retirement Income at The American College of Financial Services.

"Most financial advisers don't take a comprehensive look at home equity solutions in a retirement income plan," Mr. Hopkins said. "This can leave the client's largest asset sitting idle until being used as a last resort or as a legacy asset to heirs upon death," he added. "But for many people, using home equity more strategically and throughout retirement can be a more effective solution."

Mr. Hopkins noted that the new research highlights another important concept: "Reverse mortgages are not just for the cash-poor and house-rich client, but that reverse mortgages can help millions of middle wealth Americans in retirement."

The authors noted that despite recent changes to initial and annual mortgage insurance premium rates and lending limits that affect reverse mortgages issued after Oct. 2, none of the changes "would have a material impact on the key findings presented here."

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