Plan now to avoid outliving your money in retirement

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Knowing your expected income in retirement is critical
Steps to figure out what you'll need, how much you've invested so far, and how to address gaps between the two.

Key points

  • Figuring out how much income you'll have to cover essential living expenses in retirement is a key first step
  • A sustainable withdrawal strategy during retirement is impacted by your age, gender and appetite for risk
  • Delaying Social Security, working a post-retirement job and downsizing are all ways to increase your retirement income
  • Use the Use the Merrill Edge Net Worth Estimator™ to get a clear picture of your financial well-being
During your working years, you depend on the steady, predictable income your employer provides in order to pay your monthly bills. When you reach retirement, though, the paychecks disappear. You're suddenly responsible for making sure you've got the income you need to cover your expenses, drawing from all the sources available to you — Social Security, your retirement accounts, possibly a pension or post-retirement job and any other investments you might have. Tax consequences and required IRA minimum distributions also enter the picture, and it can all seem a little overwhelming. But it's critical to figure out how much cash you can expect from each of these sources every month.
So what's a reasonable approach to understanding how you can match your income to your needs? These five steps can help you create a plan that suits you.

1. Add up the income sources you can count on

First, look carefully at all the potential income streams you'll have in retirement, which may include:
  • Lifetime income: This category offers consistent, reliable income throughout your lifetime and includes Social Security as well as potentially a pension or annuities. One note: As you calculate the amount of Social Security available to you, keep in mind that your monthly benefit will vary according to when you choose to start collecting.
  • Additional income: Here's where you would look at income sources such as a post-retirement job and income from existing savings or other assets, including any rental properties you may have, even rooms in your home.
Take control of your saving and investing by using our Budget Worksheet to calculate your expenses in retirement.

2. Understand your budget

Now get a clear handle on your needs. Christopher Vale, senior vice president, Merrill Edge Product and Strategy, suggests starting with your essential expenses: housing, food, transportation and health care. "Because these costs are unavoidable and more consistent throughout your retirement, you'll want to match them to your most reliable lifetime income sources — like Social Security or a pension," he says. That way, you at least start with a plan that covers your essential expenses throughout your lifetime. If that reliable income falls short of covering these costs, consider ways to increase it, such as waiting longer to claim Social Security benefits (for more details, see step 4).
Once your essential expenses are covered, you may want to turn your attention to ways to meet your discretionary expenses. These costs may include entertainment, travel, gifts and helping with a child's or grandchild's education. The amount you spend can be increased or decreased more easily than your essential expenses.
How will you spend your retirement dollars?
Source: Based on estimates from Consumption Activities and Mail Survey (CMS) in Employee Benefit Research Institute (EBRI) Notes. September 2014 (latest data available).

3. Develop a withdrawal strategy for your assets

It's important to be realistic about how different withdrawal rates will affect how long your savings could last. People who suddenly have access to a large pool of savings — $1 million in an IRA, for example — may overestimate how long those savings can last, and spending too much too quickly may put them at risk for outliving their savings. "Then there are people who are so terrified they're going to run out of money that they don't even want to touch their assets and investments," says Vale. "They don't know how much they can realistically take out, so they can end up living a lifestyle below what they can actually afford."
So how much can you spend each year? While conventional advice suggests that you may be able to draw 4% of your savings per year, recent research by Nevenka Vrdoljak, director, Retirement Strategies at Bank of America Merrill Lynch, and her colleagues supports a more customized approach that accounts for such factors as your age, gender and appetite for risk. (See the chart below for details.) For example, younger retirees and women, because they tend to outlive men, may want to withdraw less than 4% each year to help avoid outliving their savings. As you grow older, you may feel comfortable withdrawing a bit more — depending on your changing needs and lifestyle.
Achievable spending rates in retirement
*Joint refers to a spending stream for a couple that lasts as long as either spouse is still alive.
Sources: Merrill Lynch Chief Investment Office; "Systematic Withdrawal Strategies for Retirees," Journal of Wealth Management, Vol. 15, No. 3 (Winter 2012), pp. 36-49.
In addition, you should consider the order in which you draw on your various accounts so you have the greatest chance of future financial security. Starting at age 70½ you must take Consider these tips when you must take your required minimum distributions (RMDs) from Traditional IRAs and 401(k)s, so that's a good place to start. But if you need to tap your assets before then, Vrdoljak recommends starting instead with your taxable accounts, because any gains you realize in a taxable account will be taxed at capital gains rates, while withdrawals from a Traditional IRA or 401(k) will be taxed as regular income, which may be higher.
If you still need more income, look next to Roth IRAs and Roth 401(k)s because you don't pay federal taxes on qualified distributions. Finally, by waiting to draw on Traditional IRAs and 401(k)s last, these tax-advantaged savings have the potential to continue growing.

4. Look for ways to boost your cash flow

"Once you've projected your expenses and income sources to establish a baseline budget, you can look for ways to improve the picture," says Vale. For example, you might:
  • Delay Social Security. Though it's tempting to start collecting your benefits at 62 instead of 70, consider waiting. Each year you delay collecting increases your monthly benefit by about 8%. "Think of that as getting an 8% annual return," Vale says. In fact, Learn about the advantages of delaying Social Security benefits until age 70 could potentially boost your expected benefit by more than $1,100 per month. Social Security benefits have the added advantage of being indexed to inflation, unlike many of the other sources of retirement funding mentioned here.
The advantages of delaying your social security benefit
Source: Merrill Lynch Investment Management & Guidance calculations based on Social Security Administration calculator at — accessed April 2016.
  • Work a while longer. Delaying retirement for just two or three years could make a big difference in your overall retirement picture. "A couple of years can matter a lot, because that impacts multiple things," says Ben Storey, senior retirement product manager, Bank of America Merrill Lynch. "Not only can your salary continue to cover your expenses, but you'll also be able to add to your investments — giving them more time to grow even as you delay the time when you start drawing from them." Another advantage to staying on the job: maintaining company-sponsored health care benefits.
  • Consider an annuity. A lifetime income annuity can guarantee a predetermined Consider investing in an annuity to guarantee a predetermined income amount for life. If you're looking at a gap between your reliable lifetime income and your essential expenses, this could help. Say you found yourself with a $10,000 annual income shortfall — an annuity that pays that amount each year, in monthly, quarterly or annual installments, could help cover your anticipated essential expenses for life.
  • Continue to pursue growth. Even as you enter retirement, it can make sense to continue investing as much as 30% to 40% of your portfolio in stocks — if you're willing to accept the risk. Storey notes that "people in their 60s may view themselves as long-term investors, because they may be living another 20 to 30 years — or longer."
  • Look into downsizing. You might boost your assets by looking into Learn about ways to tap your home equity to help fund your retirement, such as moving to a less expensive home in retirement or even relocating to a part of the country where the cost of living is lower.
Read about Learn about developing a Social Security and retirement date strategy to understand how timing might affect your benefits.

5. Keep revisiting your strategy

"Planning for retirement is not one-and-done," Storey says. "Markets are constantly changing, and so are your life and your goals. Things that seemed really important a while ago might not be as important now. That's why it makes sense to check in regularly — once a year at minimum — to review your needs and priorities."
Next steps

Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation.

Footnote 1 The achievable spending rate is the maximum initial share of wealth that a client can spend while attaining a 90% "probability of success." The probability of success measures the likelihood that a retiree will be able to spend according to plan without exhausting her wealth. Spending is assumed to rise each year with inflation. Clients are assumed to choose the allocation to stocks, bonds and cash that minimizes their expected lifetime shortfall — the amount, on average, they can expect to undershoot their lifetime spending plans.

Asset Class and Fee Assumptions
  Expected Return Expected Volatility Fees
U.S. Stocks 7.7% 16.2% 1.5%
U.S. Bonds 3.8% 6.4% 1.1%
U.S. Cash 2.4% 2.5% 0.5%
Mortality assumptions among 100,000 65-year-olds

Annuities are long-term investments designed to help meet retirement needs. They are a contractual agreement where a client makes a premium payment to an insurance company, which, in turn, agrees to provide an income stream based on the payout option selected by the owner. When considering an income annuity, be sure to consider the features and benefits of the annuity, including the available payout options as well as the lack of liquidity associated with this product type. All annuity contract and rider guarantees, or annuity payout rates, 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.