Are you among the millions of American business owners who haven’t saved enough for retirement? Whether you’re banking on selling your business as your primary retirement asset or have other conventional investments such as an IRA, real estate or college savings, you face some serious retirement risks. Chief among these: “longevity risk” — underestimating how long you will live.
Financial planners often calculate their projections based on an assumed lifespan of 85 or 90 years. But according to the Social Security Administration, 25 percent of people turning 65 today will live past age 90, and 10 percent will live past age 95. If you’re affluent, your chances of living past 95 rise dramatically.
What’s your Plan B if you’re one of the lucky ones who hangs on until 100 or beyond? Can you continue to save and invest the way you’ve been doing and know your money will last that long? Planning to make your wealth last as long as you’ll need it means considering a few key risk factors.
Common risks demand uncommon foresight.
Sequence of returns matters. If you’re a pre-retiree or a recent retiree with a large portion of wealth in equities and mutual funds (or other assets such as real estate), you face the very real risk that these investments’ market values will fall just before or after you retire. This can make the difference between enjoying a comfortable retirement and struggling as you forgo life’s luxuries — and even life’s necessities.
Related: Protect Your Corn: 3 Ways to Self-Fund Retirement in a Means-Tested Social Security World
Withdrawal rate is lower than you think. Many people plan based on the widely recommended “4-percent rule,” which advises withdrawing no more than 4 percent of retirement accounts (adjusted for inflation) each year. Recent studies, however, show that a 2.8 percent annual withdrawal rate is the maximum to make your money last. If you have $100,000 in your retirement accounts, you safely can pull out $4,000 a year using the 4-percent rule — but only $2,800 per year if you want to err on the side of safety. If you have $500,000 saved, you can withdraw $20,000 a year at the higher rate or…