The median retirement account in America holds about $65,000. That’s according to data from the Federal Reserve, which estimates that most people have about $225,000 by age 65. This is less than financial advisors recommend and it only includes people with retirement accounts. About 41% of all Americans have no retirement savings at all. Let’s say you fall somewhere in the middle of this. With $100,000 in the bank, you have more than many people but less than some. How long will this money last you in retirement? The answer is that it can last for a good long time, but you will probably need to live on a tight budget that relies heavily on Social Security. You may want to talk to a financial advisor who can help you better understand your personal situation.
Social Security and Medicare
One of the first things to do is figure out how much money you will earn in Social Security benefits while in retirement. Contrary to popular belief, this program does not guarantee income in your old age. Instead, it’s designed more as an income replacement system. The more you earned while working, the more you will receive in benefits.
So it’s essential to understand how much you, specifically, can plan for. You can get a general estimate of your benefits by using tools like SmartAsset’s Social Security calculator and you can get a much more specific set of numbers by requesting your Social Security statement from the SSA.
In general, the average recipient collects about $1,750 in benefits from Social Security. That comes to around $21,000 per year in income. That’s not a lot, but it can be enough to live comfortably on in the right parts of the country. You can’t live in Manhattan on this, but upstate Michigan is a very different story.
If at all possible, wait on retirement until age 70. The later you wait to begin collecting benefits, the more you will receive in monthly payments. At age 70, the maximum age, the difference in lifetime benefits is substantial and can make your retirement much easier.
Then, plan to phase out much of your medical insurance (depending on how much you pay already). Medicare covers most basic needs, which is a huge help for retirees planning how to spend their money. But and this is essential, this does not mean you will have no health spending at all. Medicare covers most needs, but not all, so most people will need supplemental insurance. Prepare for that in your budget.
Income and Growth
Now let’s look at how your account will grow. No retirement account needs to be static. You will keep your money invested in some sort of portfolio, which will generate additional growth over time. After all, retirement is long. Your money doesn’t need to sit still over all those years.
The challenge is that, with $100,000, you will need to strike a balance between risk and reward. This money will need to generate some returns because there isn’t enough here to rely on the principal in the account for several decades. However, for the same reason, you can’t afford to take significant losses.
An S&P 500 index fund, for example, will generate an average of 10% in annual returns. If you never draw down on the principal this can generate $10,000 per year, which is a significant boost to your income. Alongside average Social Security benefits, this would boost your income to $31,000 per year, more with a well-calculated phase-out plan that draws down a little bit on the principal each year. But the problem is that the stock market is volatile. Some years you might collect $10,000 in returns, some years you might get nothing at all and some years you might take an active loss. This might not be affordable.
You could invest, instead, in the bond market. This is a standard shift for retirees, who often move their money out of stocks and into bonds for security. Doing so will generally protect your portfolio against loss, but it will also cut your expected growth in half, with the average corporate bond returning about 5% in payments each year. If you never touch the principal that will generate about 5% each year or $5,000, bringing an average income up to $26,000 with Social Security included.
There are also annuities. If you buy a lifetime annuity for $100,000 at the time of your retirement, it might generate about $7,600 in income each year. This is less than a stock portfolio would throw off, but it’s a guaranteed payment that requires no drawdown on your principal. (In fact, with a lifetime annuity you cannot touch the principal in the account.) Along with Social Security, this would generate about $28,600 in annual income.
Spending and Withdrawals
As noted above, another critical question is whether to draw down on your principal. The problem here is that, with $100,000 in savings, almost any withdrawals will quickly impact the portfolio’s returns. This can create a pretty severe feedback loop, in which cutting your returns forces you to draw down further on the principal, cutting your returns further and so on.
With the right plan, you can afford to take a very modest amount out of your portfolio each year without exhausting your money early, but almost any significant rate of withdrawal will drain your savings at some point during retirement. This would give you a modestly improved early retirement and a significantly harder life later on.
For example, say you invest in bonds with an average 5% interest rate. This lets you collect $5,000 per year from your portfolio ideally indefinitely, since it is all interest payments. You could add another $1,000 per year in principal withdrawals, for a total of $6,000 per year in portfolio income and have a portfolio lifetime of more than 30 years.
But even here there’s a huge risk. On the one hand, $1,000 is a lot of money. On a tight budget that can make a big difference in your quality of life. On the other hand, even at this rate of withdrawal, you will likely exhaust your savings between 30 – 35 years. Say that you retire at age 70. Life is getting longer and health is improving. If you do live to be more than 100 years old, you will find yourself running out of money at exactly the point when you are least able to do anything about it.
And, again, your margins are very thin. Even boosting that to $6,500 will change the math entirely, causing you to run out of money after 25 years, quite realistically in the later stages of your life. The result is that you should expect to make at most very small withdrawals from the principal of your retirement account and you should do this based on calculations you make with a qualified financial professional. Anything beyond that will begin to erode your portfolio’s ability to generate returns very quickly.
Depending on when you retire and how you invest, you may be able to withdraw an additional $1,000 – $2,000 on top of your returns. Much beyond this, however, will cause a feedback loop likely leading you to run out of money in your late 80s or early 90s. Given modern life expectancies, it is reasonable to plan on living that long and you don’t want to risk running out of money on your 90th birthday.
With $100,000 you should budget for a retirement income of around $5,000 to $8,000 on top of Social Security, depending on how you have invested your money. Much more than this will likely cause you to run out of money within 25 – 30 years, which is potentially within the lifespan of the average retiree. You should speak to an expert to dive into your unique retirement situation in order to learn more.
Retirement Planning Tips
- While beyond the scope of this article, an excellent way to extend the life of your retirement account is by managing your taxes well. Here are a few ways to get started on that.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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