5 strategies to help you avoid outliving your retirement savings

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Rising life expectancies mean longer retirements and savings challenges. Use these strategies to help you create sufficient retirement income to last throughout your lifetime.

Key points

  • The average American today spends roughly 20 years in retirement, so the earlier you start preparing for it, the better
  • Whether you're close to retirement or it's far away, determine if your assets are invested and allocated to help you avoid outliving your money
  • If your savings may fall short, consider working a few years longer and delaying the start of Social Security benefits

The miracle of longevity

Not long ago, corporate pensions and moderate medical costs helped ease any worries of outliving retirement assets. But today, much of the burden of saving for retirement has shifted to individuals, who must factor in sharply rising health expenses and the chance that they may live significantly longer than their parents did. And while longer life expectancy is generally great news, it means savings may have to last longer too. Recent research from the U.S. Department of Labor shows that the average American today spends roughly 20 years in retirement.1 Another report says about one-quarter of Americans are likely to run out of money during their retirement years.2
"Longevity is a miracle, but it's also people's biggest fear," says David Laster, Managing Director; Head of Retirement Strategies at Bank of America Merrill Lynch. Helping your assets last in retirement requires careful, early planning to identify financial objectives and develop appropriate strategies to meet them, Laster adds. And those approaches will need to be revisited regularly to make sure you're still on track.

1. Start saving early

The more you save and invest, and the earlier you begin, the more likely it is that you may accumulate sufficient assets to fund a long retirement. Try setting a goal of saving 10% of your annual income for retirement. You can contribute that money to your IRA, a retirement plan at work or both.
As long as you are working, also consider contributing enough to your 401(k) plan to get the maximum matching contribution your employer may offer, says Christopher Vale, senior vice president, Merrill Edge Product Solutions. This may be harder when you are young, but it's a good idea for younger investors to meet the match, even if they have to stretch to do it, because it delivers an immediate gain of up to 100% on the amount contributed.

The more you save and the earlier you begin, the more likely you may accumulate sufficient assets to fund a long retirement.

Personal retirement accounts, such as traditional or Roth IRAs, are another way to build a nest egg for a long retirement.
  • Traditional IRA contributions may be tax-deductible, and investment earnings have the opportunity to grow tax-deferred until you make withdrawals during retirement3
  • Roth IRAs are funded by after-tax contributions and they can be withdrawn at any time free of taxes. Qualified withdrawals of earnings are federally tax-free and may be state tax-free.4
Find out which IRA may be right for you and also check the IRA Contribution Limits chart below. You may even consider setting up automatic contributions as a simple way to be sure you make regular payments into your IRA, using the Merrill Edge Automated Funding Service.5

2. Increase your retirement contributions over time

Even younger savers on stretched budgets may be able to find ways to contribute as much as possible by looking for routine expenses they can cut back on, or by using a portion of an employee bonus or raise. They might also consider setting up automatic annual increases in contributions to a retirement plan at work, if that option is available. Although saving and investing can be a big challenge early in a career, it also offers many advantages. "The further away you are from retirement, the more time you have to possibly recover from down market cycles, allowing you to invest in riskier investments, which may give you the potential for greater returns," Vale says. Plus, your investments have the opportunity to accumulate and grow over dozens of years.
Starting early yields big results
Source: ChartSource, DST Systems Inc. This example is hypothetical and does not represent the performance of a particular investment. Your results will vary. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example.
When you're nearer to retirement, it makes sense to closely assess your financial readiness and project whether your current savings strategies are on target by estimating your retirement expenses and your projected income. Learn about the Merrill Edge Retirement Evaluator™ to help assess whether you're on track.
If you discover that you are off track with your target goals, consider trying to maximize contributions to your tax-advantaged retirement accounts.6 Beginning at age 50, you're eligible to go beyond the normal limits with catch-up contributions to 401(k)s and IRAs. This can help boost your retirement savings as well.

Contribution limits

The maximum retirement contribution allowed increases when you reach age 50. Make sure to take advantage of this higher limit.
  Maximum contributions for 2016 and 2017
Traditional* or Roth IRAs $6,500
401(k)s $24,000
* Contributions to Traditional IRA accounts may be tax deductible. 2016 and 2017 IRS annual modified gross income restrictions are $61,000 for head of household or single filer and $98,000 for married couples. Consult your tax advisor as there are phase-out ranges for IRA contribution deductibility based on your age; tax filing status (married, filing jointly; married, filing separately; spousal IRA, filing jointly); and whether or not you participate in an employer-sponsored plan.

3. Revisit asset allocation regularly

Whether retirement is decades away or just around the corner, it's always important to regularly reevaluate how you've divided your assets among stocks, bonds and other investment options, and to consider how each may help you avoid outliving your assets. The Merrill Edge Asset Allocator™ tool can help you determine and reexamine your asset allocation based on your investment style, time horizon, liquidity needs and tolerance for risk. Please note that asset allocation does not ensure a profit or protect against loss in declining markets.
Although the average American lives for roughly 20 years after retiring, many live much longer, so it's prudent "to plan for your assets to have the opportunity to grow and last for at least 30 years in retirement," Vale says. Each of the following might play a role in that process.
  • Bonds, with their steady income, may help you avoid short-term volatility in financial markets. They also allow you to know precisely how much cash you'll get at maturity. In general, says Laster, a good rule of thumb when you retire is to allocate approximately 60% of your portfolio to bonds or bond-like instruments, such as target-date funds or annuities.
  • Stocks also can be an important part of the mix if you are willing to take on more risk. In the past, investors often wanted to eliminate as much risk as possible when retirement neared, allocating much less to equities. But longer retirements may increase the need for the growth that stocks potentially provide.
  • Mutual funds provide the benefit of diversification, and they allow your investments to be managed by a professional money manager. By adding your money to a pool with other investors, you can make investments that might not otherwise be available or affordable to an individual.
  • Exchange-traded funds (ETFs) trade like stocks and are often tied to a stock or bond index, such as the Standard & Poor's 500 or the Barclays U.S. Aggregate Bond Index. "If you're willing to give up some of the potential financial gain that actively managed funds might give you and just match the index, an ETF is a lower-cost option," Vale says. And you still have the growth potential of the stock market. ETFs also can be used to invest in other asset classes, such as commodities or real estate.
  • Target-date funds automatically adjust their asset mixes to become more conservative as retirement approaches.
  • Annuities are popular among investors who want a lifetime income stream in retirement. Like a personal pension, "annuities are best used to cover those essential needs you're going to have throughout retirement," such as housing, food and healthcare, says Vale. Discretionary needs may then be addressed with investments that are less predictable but have potential for higher growth.

4. Consider delaying Social Security income

As retirement nears, another key strategy to help you avoid outlasting your savings is to consider delaying the start of Social Security benefits. Waiting until age 70, compared with beginning at age 62 (the earliest opportunity to start receiving payments), increases the amount of your lifetime monthly benefit by 76%. Read more about how waiting to collect Social Security can boost your benefit.
The advantages of delaying your Social Security benefit
Source: Merrill Lynch Investment Management & Guidance calculations based on Social Security Administration calculator at socialsecurity.gov/OACT/quickcalc/ (accessed April 2016).
* Full Retirement Age is the age at which a person may first become entitled to full or unreduced retirement benefits.
Working past retirement age, or launching a second career, also gives you more time to save and invest, and allows your existing assets the opportunity to appreciate.

5. Other ways to help protect your retirement assets

  • Health savings accounts are a tax-favored tool for paying qualified medical costs. They can be opened when you are young, and the funds accumulated can be used at any future point. Later, they can help cover the costs Medicare doesn't cover, such as nursing home, dental and vision care. Contributions are tax-deductible, earnings are tax-deferred and withdrawals for qualified medical expenses are free from federal taxes.
  • Long-term care insurance helps cover the high cost of nursing home care, which currently averages more than $91,000 annually7. The rising cost of healthcare is among the primary financial concerns for consumers, and this coverage can help reduce the risk that retirement savings will be wiped out by the need for long-term care.
  • Downsizing to a smaller home, or relocating to a more affordable area that has a lower cost of living, can deliver big savings on maintenance, energy bills and property taxes in retirement.
Retirement today is no longer the finish line that it was for past generations - it's the start of a journey that may last for decades. If you find you're behind on saving for retirement, strategic moves now could help you get on track.
"There's no one-size-fits-all strategy when it comes to investing for longevity; it depends on a person's individual time horizon and tolerance for risk," says Debra Greenberg, director, IRA product management, Merrill Lynch. "Start doing your homework today so you can be well prepared for tomorrow."
Next steps

All annuity contract and rider guarantees, including optional benefits or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.

1 U.S. Department of Labor, Top 10 Ways to Prepare for Retirement

2 Society of Actuaries: Running Out of Money in Retirement, page 18

3 For traditional IRAs - If you withdraw funds before age 59½, you may be subject to a 10% early withdrawal additional tax unless one of the following exceptions apply: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.

4 For a withdrawal from a Roth IRA to be federal (and, in most cases, state) income tax-free, it must be considered qualified. There is a five-year holding period when determining whether earnings can be withdrawn tax-free as part of a qualified distribution from a Roth IRA. This period begins January 1 of the tax year of the first contribution or the year of conversion to any Roth IRA. The distribution must be made after the five-year holding period, and the individual must have reached age 59½, be deceased or disabled or intend to use the funds for a first-time home purchase (lifetime limit of $10,000). There is a 10% additional federal income tax for non-qualified withdrawals of earnings taken before age 59½, unless one of the following exceptions applies: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments. A special provision applies for converted assets. If a non-qualified withdrawal is made within five years of the conversion, the earnings withdrawn will be subject to income tax, and the entire withdrawal may be subject to an additional 10% federal income tax unless an exception applies.

5 Keep in mind that an automated investment plan cannot guarantee a profit or prevent a loss in declining markets. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.

6 Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

7 Genworth 2015 Cost of Care Survey