Don't Fall Into This Common Retirement Savings Trap
For quite some time there have been numerous studies out there that have tried to tackle the question of how much a retiree can withdraw from their retirement savings without running out of money.
People in the industry call this the safe withdrawal rate. The rate most commonly talked about and put into practice is the so-called 4% rule.
In the early 1990s, CFP William Bengen produced work that found that 4% was a safe rate of withdrawal to determine if your nest egg was sufficient to last for 30 years.
So to put this in application, if you know that your retirement expenses would be for example $50,000, then you could multiply this number by 25 - which is the inverse of 4%. In this example your total retirement savings should be $1,250,000.
As you may have realized, this rule of thumb will almost always overestimate your needed amount because it doesn't account for income during those 30 years.
But here's a catch. Bengen made the follow assertions with his work:
- Your retirement will last for 30 years,
- Your savings will be held in a tax-deferred account
- There will be nothing left for heirs.
If you change one of these factors, your safe withdrawal rate will change with it. But that's just the tip of the iceberg.
Recently, new research has looked into other variables that affect how much you will need in retirement.
Here's what's becoming the "new school process" in determining what you need to safely retire.
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The Scariest Facts about America's Retirement Crisis
Americans' dreams of the "golden years" have increasingly become tarnished by harsh financial realities.
Indeed, a new survey of U.S. employees and retirees presents a disturbing portrait of the retirement crisis - among both current workers and retirees.
Longer life expectancies, stagnant wages and the uncertainty surrounding Social Security benefits have made it harder than ever to save enough to live comfortably in retirement.
The 23rd annual Retirement Confidence Survey by the non-profit, non-partisan Employee Benefit Research Institute - which polls both workers and retirees -found only 13% of American workers and 18% of retirees are "very confident" they have or will have enough money to retire comfortably. And 49% of workers said they are either "not at all" or "not too" confident they will have enough money to enjoy retirement.
"Not only do workers lack confidence about their ability to secure a financially secure retirement overall, but more and more, they lack confidence in their ability to pay for medical expenses and even basic expenses such as food, clothing and shelter," Jack VanDerhi, research director at EBRI, said in a statement.
These statistics show just how difficult it has become for Americans to save enough for retirement.
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How Millions of Americans Are Ruining Their Retirement Savings
Millions of Americans are going down a dangerous slope with their retirement savings.
More than one in four employees with 401(k) or other retirement accounts are tapping into those funds to pay mortgages, credit card debt and other bills, financial advisory firm HelloWallet said in a new report out this week.
Most of those dipping into their retirement funds before age 59½ are doing so because they are struggling to get by. American families average only $4,000 in savings accounts.
But dipping into retirement savings comes with a heavy price - and many of those who do so fail to realize the consequences, including IRS penalties and income tax on early withdrawals as well as any taxes on investment gains.
"Workers are now broadly voting with their wallets and demonstrating that they need retirement savings for non-retirement needs, in spite of the large, punitive penalties that are associated with most of that withdrawal activity," HelloWallet said in the report.
Cushion Your Retirement by Investing in IRAs
If I were to recommend a stock and guarantee a return of 10% to 28% on your investment in a single day, you'd no doubt line up at your broker's door to place your orders.
Are You Worried About Your Retirement Savings?
But then why do so many people fail to make the maximum contribution to their Individual Retirement Accounts (IRAs)? After all, in its traditional version, an IRA offers exactly the same return, depending on your personal tax bracket.
Contributions to a traditional IRA are immediately deductible from income for the tax year in which they are made.
Retirement used to be synonymous with leisure and travel. Americans believed that decades of hard work and thriftiness would make for a prosperous and successful life they could enjoy after their jobs - the "American Dream."
Now retirement doesn't evoke the same sense of tranquility for most U.S. workers. Instead, economic anxiety has taken its toll.
Americans used to ride a "three-lane highway" into retirement: a traditional pension, Social Security, and individual savings plans, like 401(k)s.
But the recent economic downturn packed a devastating punch to many 401(k) accounts, U.S. households have dipped into savings to make ends meet, and debt-laden federal, state and local governments will have trouble meeting pension and Social Security obligations.