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What if I don’t have enough money saved to retire?

Steven Podnos MD CFP


A:  In my last column, I reviewed the basic math involved in determining whether your investment portfolio was “enough” to suffice for your retirement needs.  The formula was to take your estimated living expenses, subtract social security and other sources of secure income (pensions, etc.) and then expect no more than a 4% withdrawal rate from your initial investment portfolio.  The example was a couple retiring at age 65 that needed $65,000 a year for lifestyle expenses, and had Social Security payments of $32,000 annually.  We figured that they needed $33,000 to $40,000 from their investment portfolio (a fudge factor for taxes).  Using an initial 4% withdrawal rate meant that they need a $1,000,000 portfolio.

What if they only have $750,000?  A 4% withdrawal rate may mean up to a $10,000 shortfall in annual income, or using a higher withdrawal rate that might mean running out of money too early.  There are a few options for our couple to consider.

First, they can adapt and spend less.  This may mean not having exactly the lifestyle they had planned on, but life involves compromises.  Or, one of the couple might work longer to supply more income and savings than they had planned to do.  Either of these options are better than taking the chance of becoming impoverished late in life.

There are a couple of other choices as well that involve annuities.  A deferred annuity involves giving an insurance company a lump sum of money in return for a guaranteed stream of income.  You actually get a better certain return than you would get from your investments, but at the sacrifice of losing all your principal at the second spouse’s death. It may be too bad for the kids (less or no inheritance), but you had more money in retirement.  Currently a $100,000 immediate annuity would pay a couple at least $6000 a year for both lives, which is appreciably more than the “safe” 4% withdrawal. Some, but not many annuities will also adjust for future inflation, but at the cost of lower initial payments. Also, your payments depend on the insurance company remaining solvent for all the years of your retirement. There are some other downsides to a deferred annuity, but it is one tool for income when you have not saved enough.

Another option is a variable deferred annuity with guaranteed withdrawal benefits for life.  This option is both expensive and very complicated, yet done carefully it can offer a higher income during retirement than the safe withdrawal rate in certain circumstances.  Don’t buy one of these without expert counsel.

So, I’ve presented five choices-1) save enough to begin with, 2) decrease living expenses to match savings, 3) work and save longer than planned, 4) use an immediate annuity for part of your investment portfolio and 5) use a deferred annuity with special guaranteed lifetime benefits.  Go for number one!





Disclosure: none