Retirement Savings: How Fast Should Your Net Worth Decrease in Retirement?
Written by
Martin Dasko
Edited by
Amber Barkley
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If you’re planning for your retirement, you’ve likely looked into all of the possible options for how you will replace your income when you’re no longer working. There are various options for retirement income and how you plan on surviving when you’re retired. The goal is to ensure that you have enough retirement savings to fund your lifestyle when you’re out of the workforce so that you don’t have to compromise the quality of your life or return to work.
Here’s a look at what your net worth should do in retirement and tips for ensuring that your savings don’t decrease too quickly in retirement.
How Fast Should Your Net Worth Decrease in Retirement?
“There’s no one-size-fits-all answer to the question of net worth reduction in retirement,” remarked Benjamin Brandt, a certified financial planner and a retirement podcaster behind the brand Retirement Starts Today. “However, whatever your approach to increasing or decreasing net worth in retirement, your plan should be intentional.”
The key takeaway is that how quickly you deplete your retirement savings will depend on how much money you’ve set aside for your golden years and the type of lifestyle that you plan on maintaining. The amount that you spend should be tied to how much you have saved and the income that you have. This is why it’s beneficial to work with a retirement specialist to help you figure out your numbers.
What If Your Net Worth Is Decreasing Too Fast?
The goal is to ensure your finances don’t get too depleted too fast in your retirement while you try to enjoy your life. What do you do if your net worth decreases too quickly in your golden years?
“I advise clients to have ‘Guardrails’ that tie spending in retirement to their portfolio balances,” said Brandt. “This way, as the portfolio goes up, your spending can increase. On the other hand, if the portfolio drops, retirees can gradually reduce spending until the market recovers.”
As a retiree, it’s essential that you pay attention to your finances so that you’re not spending more money than you can afford to. You don’t want to find yourself being forced to return to the workforce.
“The distribution phase of retirement is a tricky time,” expressed Jen Mann, certified financial planner and vice president in the Chicago office of Lenox Advisors. “An income annuity helps mitigate longevity risk. Investments in the market help with inflation risk. Whole life insurance cash value helps mitigate market volatility. Having money in savings helps with liquidity. Combining these four things can give you the best chance of success in retirement — no matter how long you live!”
The 4% Rule for Retirement
If you’ve done any retirement planning, you’ve likely heard about the 4% rule. The rule is reasonably simple, and it works like this:
- You combine all of your investments to figure out how much money you have set aside for retirement.
- You withdraw 4% of this investment in your first year of retirement. So, if you saved a million dollars, you would take out $40,000 in your first year as your retirement income.
- You adjust the amount of retirement income that you take out based on inflation. So, say that the cost of living has gone up 2% by the second year — then you would take out $40,800.
The goal of this rule is to ensure that you have a stable retirement income throughout a span of 30 years. With this distribution figure, you can plan accordingly based on market fluctuations, since you have a target to aim for.
The major flaw with this general rule is that you’re assuming a 30-year period and relying on historical returns. You’re also not factoring in taxes and investment fees. It’s worth mentioning that this rule is considered a decent starting point for anyone planning for retirement by many financial experts, since it gives you something to strive for. As always, you must consider the reality of market fluctuations and other factors out of your control.
How Should You Plan To Use Your Retirement Savings?
“Have a written retirement plan, have a plan to increase spending when the market is cooperative and a plan to temporarily reduce spending when the market isn’t as cooperative,” Mann said. “Then, simply enjoy the fruits of your labor!” Whatever rule or system you follow, the goal is to ensure you’re prepared for your golden years. Everyone’s retirement will look different, and your spending will depend on your desired lifestyle.
“You’re no longer working and bringing in earned income, and you become very vulnerable to things like inflation, interest rates and market fluctuations,” said Mann. “Since we don’t know what the future looks like or how long we will live, you have to give your nest egg the best chance of success.”
Mann makes a pivotal point that many financial experts will likely agree with. If you’re still working and investing, it’s critical to find ways to add to your retirement funds.
The goal should be to maximize the side of your retirement nest egg when you’re still working and investing. Suze Orman has stated that you should stop supporting your adult children so that you can make your retirement a priority. That’s just one strategy that will help you invest more in income-generating assets for your golden years. You will want to take the necessary steps to ensure that you have the net worth for a comfortable retirement.
Closing Thoughts
“There will never be a time when it ‘feels right’ to start drawing down your portfolio. If you wait for that perfect time, you might be waiting forever,” Brandt concluded. If you’re worried about your net worth in your retirement, it’s critical that you work with a specialist to ensure that you have a calculated plan based on your trajectory and your desired lifestyle.
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