Home > Personal Finance > 4 Keys to a Successful Retirement

Comments 3 Comments

4 Keys to a Successful RetirementAll of us hope that at the end of a long career we will be able to enjoy retirement secure in the knowledge that we can support our desired lifestyle without ever running out of money. Given that Americans are living longer than ever before, however, the risk of outliving our money in retirement is real. Diligence, careful planning and realistic expectations are therefore essential to achieving a successful life once our working life is done.

Here are some key areas to focus on as you plan ahead for your retirement.

[Related Article: 4 Tax Benefits You Missed This Year]

1. Save Enough

In order to realize our desired retirement lifestyle without fear of outliving our money, we need to accumulate enough savings. But how much is enough? That depends on the annual cost of our desired lifestyle. For many, maintaining their current lifestyle in retirement is the goal, so knowing what it currently costs to support that lifestyle is important.

Once we have determined a target annual income in retirement, we can calculate how much of a nest egg will be required to support that income.

Free Credit Check & MonitoringOne way to calculate the size of the required nest egg is to back into it using a common rule of thumb known as the “4% Rule.” This rule is typically used to determine a “safe withdrawal rate” in retirement but is also useful in determining the required savings amount to support a target retirement income stream.

The 4% rule states that a retiree aged 60-65 can safely withdraw 4% a year from a reasonably diversified portfolio divided equally between stocks and bonds (adjusting that rate by annual inflation) and not run out of money for at least 30 years.

Using this rule of thumb, one would need to accumulate $1.5 million by the start of retirement in order to safely withdraw an inflation-adjusted $60,000 per year for 30 years. This is certainly not an insignificant sum. Supporting an inflation-adjusted income of $100,000 per year requires an accumulation of $2.5 million, an even more imposing amount. (Note that the 4% rule has been refined over the years and is also being called into question by some in light of the current low yield environment for bonds.)

While Social Security can provide additional income to supplement a portfolio in retirement, it is clear that saving as much as we can during our working lives is key to being able to afford a quality retirement. Taking advantage of workplace retirement savings plans, such as a 401K, and supplementing that by additional tax-deferred and taxable savings is essential. Target saving at least 10% of your gross annual income throughout your working life and remember that the key to accumulating wealth is to save as much as you can for as long as you can in order to allow the power of compounding to work for you.

2. Tax Diversify Your Savings

The effect of income taxes on our retirement should not be forgotten. Taxes are another “cost” impacting retirement cash flow. It is therefore important to minimize this impact as much as possible through good tax planning.

One way to achieve tax efficiency in retirement is to diversify pre-retirement savings across taxable, tax deferred and tax-free accounts. This practice of “tax diversification” will allow one to fine-tune portfolio withdrawals in retirement, depending on their relative tax impact, and carefully choose which “buckets” to tap for ongoing income needs.

Tapping taxable accounts first often makes the most sense given that this strategy typically enables a retiree to pay less income and capital gains tax while allowing savings to continue to grow in tax-deferred IRA and Roth accounts.

Ongoing tax planning is crucial for single retirees, given how quickly income tax rates rise for single people, as well as for married couples since it is inevitable that one spouse will predecease the other at some point in the future.

[Related Article: Can You Really Get Your Credit Score for Free?]

3. Use Effective Social Security Taking Strategies

The future of Social Security is often called into question raising concern regarding whether this program will be available to supplement our portfolio income in retirement.

It is true that current projections show Social Security benefit payouts starting to exceed program revenues beginning in 2016. However, even if no reforms are implemented, it is expected that Social Security will continue to be able to pay out 100% of benefits until 2033, and approximately 75% of benefits thereafter.

Social Security is therefore likely to remain a resource in retirement and maximizing this benefit is important. The fact that Social Security benefits are indexed for inflation throughout the benefit period and continue to be paid to surviving spouses make this program unique and an important supplement to an investment portfolio.

A discussion of the array of Social Security taking strategies is beyond the scope of this article. It is important to note, however, that there is a penalty of approximately 8% for each year benefits are taken before full retirement age. This reduction is permanent and also impacts surviving spouse benefits.

Deferring Social Security at least until full retirement age (age 66 for those born during 1943-1954) can result in significant additional retirement income. Waiting until the maximum deferral age of 70 will increase benefits by an additional 8% each year, to a maximum of 132% of the full retirement age benefit for most baby boomers. This strategy is recommended for the higher earning spouse in a married couple.

4. Have Realistic Expectations

Perhaps the biggest key to retirement success is to have a realistic expectation of the lifestyle we can afford. If savings and other sources of retirement income fall short of our goal as we near target retirement age, we need to assess our options. These essentially come down to living a more modest retirement lifestyle, working longer, or some combination of the two. Rarely is it prudent to swing for the fences by increasing the risk of our investments in an effort to overcome a savings shortfall. This strategy can backfire, leaving you in a deeper hole with no time to recover.

Retirement planning is fraught with complexity. There are no guarantees that we will achieve our goal and lots of risk of falling short given the vagaries of the stock market and the uncertainty around Social Security. The above discussion did not even touch on healthcare costs and the cloudy future of Medicare.

It can be daunting to try to navigate the retirement planning maze on one’s own. Consider working with a fee-only financial adviser to be your guide along the way and increase the chance that you will achieve your retirement goals, whatever those may be. Good luck!

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team