More than half of retirement savers don’t know this

Retirement Planning can be a stressful time. A recent survey showed that more than half of the people between ages 45 and older were not sure how to invest their money in retirement and did not know how their assets were allocated. A little less than half of the people surveyed were concerned about outliving their assets. It is important while investing for your retirement to know the difference between the principal and the earnings of your account. Principal is the amount of money that is beginning amount or the amount that you put into the account. Earnings, is money made off of principal amount over time by way of dividends, interest, and capital gains (increase in stock price is an example of capital gains). The secret to making your money last longer is by living off the earnings.

As a general rule, Financial Planners use 7% as a target for long-term investments which is how the market has performed in the past over the years. While planning for 7% returns, it is also important to know that the return can be much higher or much lower than that. Since the market is very volatile, a conservative 4% rule is used when withdrawing from your account and that is withdrawing no more than 4% to 4.5% of the account value (balance) every year. This is considered “safe” to account for any short-term market downturns. The tradeoff of playing it safe and using the 4% rule is that you may die with more money than you started your retirement account with.

Some may think that it would be safer and smarter to not invest their money, but that is not a wise idea.

  • Say that you have $1 Million and you follow the 4% rule without investing (withdrawing $45,000 annually), your money would last you 22 years.
  • Say you put $1 million in a cash savings account earning 2% and follow the 4% rule (Withdrawing only $45,000 annually), your money would last you a little over 29 years.

Even earning just 2% on a cash savings account would extend your money another 7 years and with other investments that potential for higher returns and more money, would last you even longer.

Some asset types to have in your account may include cash, stocks, and bonds. Each of these asset types has different risks and potential. Cash loses buying power due to inflation, but doesn’t lose value. Stock and stock funds have the potential to grow high, but can lose value fast in market changes. Bonds and bond funds have predictable earnings, but don’t have as high of a growth potential as stocks do. If in or near retirement, having around 50% of your money in bonds or bond funds may be smart idea.

Retirement planning can be stressful and confusing so come see Al Cartlidge. He can help with all of your retirement concerns.

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