Your retirement could span two decades or more (knock on wood), but have you considered whether your retirement savings will last? Well, your answer will depend on three things:
- How much you set aside now.
- Your withdrawal rate during retirement.
- How you invest your savings once you retire.
To stockpile enough income for retirement, most experts recommend saving between 10-15 percent of your annual pay throughout your career. If you haven’t done so, don’t give up; but start saving as much as you can, as soon as you can.
Where a lot of people get in trouble is when they try to determine a safe withdrawal rate. They retire with what seems like a lot of money in the bank; but then they start spending it, forgetting that money has to last. This might seem like a no brainer, but it’s easy to kick off retirement with lots of celebratory spending (world cruise anyone?)
That’s why determining a safe withdrawal rate — how much to take out each year without depleting your savings — is so important. For years, the recommendation was a four percent withdrawal rate. But that was during ordinary times. What about when something unexpected happens — like the current low yields on conservative investments? Not many saw that coming.
Today, many experts are recommending a three percent withdrawal rate. Your financial professional can help you determine the appropriate withdrawal rate for your situation.
Lastly, the mix of investments you choose, also known as asset allocation, is critical to having the savings to access. Although it may seem like investing primarily in stocks would provide the best odds of success, that’s not necessarily the case. A high stock allocation can also mean the potential for high volatility, increasing the chance of a setback. Of course, being too conservative also has its risks — like missing the potential for greater returns and not keeping up with inflation.
The right asset allocation for you depends on a lot of things — like savings amounts, number of years until you’ll need the money, and your comfort level with risk. And it will likely be fluid: depending on your goals and age, your asset allocation strategy will likely change over time.
Touching base with your financial professional at least once a year is a good way to ensure all these complex elements align before and during retirement.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.
Asset allocation/diversification does not guarantee a profit or protect against a loss.