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How to make sure you won’t outlive your retirement savings

CFP Roger Young weighed in with tips for saving enough money to carry you through retirement.

AleksandarNakic | E+ | Getty Images

The decision to leave the workforce and enter retirement is an important one. On the one hand, there's much to look forward to in retirement, including more time for family, hobbies and traveling. But for many people the thought of their golden years is sometimes still a source of stress and concern.

Forty-five percent of baby boomers say that outliving their savings and investments is one of their greatest retirement fears, according to the Transamerica Center for Retirement Studies' 20th Annual Retirement Survey of Workers.

So Select asked Roger Young, a Senior Financial Planner at investment management company T. Rowe Price, to share some tips that can help people avoid a situation where they don't have enough money to carry themselves through retirement. Here's what he shared.

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Before you retire

1. Work toward saving 15% of your income for retirement each year

"The first thing you can do is start saving as much as you can right now," Young said. "We recommend saving 15% of your salary towards retirement each year, which includes your 401(k) contributions and any matching contributed by your employer."

Why 15% you may ask? According to Fidelity, most people will need at least 55% of their pre-retirement income to maintain their lifestyle once they're no longer in the work force. After accounting for Social Security benefits, they found that 45% of the money needed for retirement will come from savings. Therefore, saving 15% each year starting from age 25 should allow you to hit that target by retirement age (which, in this case, is 67).

Of course, stashing away 15% of your income every year can be easier said than done when you have expenses like rent, food, childcare and more throughout the year. So if you can't immediately contribute the recommended 15%, Young suggests starting with what you can and slowly working your way up each year.

"As an example, you can set up an automatic increase in your 401(k) contribution rate so every year it bumps it up by 1% or 2%," he explained. "This way, you can get to that 15% a lot quicker."

2. Invest your money in tax-advantaged accounts

Another extremely important part of investing for the future is understanding the tax implications of the different investment vehicles. A traditional 401(k) account and a traditional IRA, for example, let you invest pre-tax money now and only pay taxes on the money you withdraw in retirement. With a Roth 401(k) or Roth IRA, though, you invest money that you've already been taxed on so you won't get hit with a tax bill when you make withdrawals later.

Paying taxes now so you can set yourself up to not owe taxes later can be useful if you expect to be in a higher tax bracket in retirement (based on how much money you'll need to withdraw each year; remember that retirement withdrawals essentially become your income). And, saving on taxes in retirement can leave you with more cash to spend.

You can open an IRA or Roth IRA with a traditional brokerage like Fidelity and choose the investments yourself. Or you can sign up for a robo-advisor, like Wealthfront and Betterment, which helps you determine which investments make sense for you based on your risk tolerance, goals and retirement date. Plus, a robo-advisor will automatically rebalance your portfolio over time.

3. Pay attention to how much of your paycheck gets contributed to your 401(k)

Many employers automatically enroll employees in 401(k) plans at a certain contribution rate. This means that once you begin working at that company, a percentage — like 3%, for example — will be automatically deducted from your paycheck and put into your 401(k).

This can be a great way to help employees start saving, especially since it's easy to get bogged down by other aspects of onboarding when you just start a new job. However, Young cautions against taking a passive role when it comes to how much of your paycheck gets contributed to your 401(k).

"It's good that companies auto-enroll people but if it's a low contribution level, it's probably not enough for most people," he said.

Plan to speak to HR for steps for figuring out how much you're currently contributing and how to change your contribution percentage if it doesn't suit you. Also make sure you're contributing enough to receive your employer match.

4. Build up a cash reserve

It's important to invest your money so it can grow enough for you to retire, but it can also be important to have some cash on the sidelines for your golden years. This is because, of course, emergency expenses may pop up in retirement.

But Select previously spoke to Michael Powers, a CFP at Manuka Financial, and according to him, you also want to avoid selling your investments at the bottom of the market. Keeping your money invested even during an economic downturn gives it room to rebound over the next few years so you'll have more money to withdraw from.

"Instead of pulling from your investment you can use a cash reserve," he had explained. "This takes some pressure off your investments in a bear market."

High-yield savings accounts — like the Marcus by Goldman Sachs Online Savings Account and Ally Online Savings Account — are generally recommended for parking cash at any age since you'll earn higher interest payments on your balance compared to what you'd typically get with a traditional savings account.

5. Figure out how much money you'll need in retirement

Your retirement number can basically be your signal that you've saved enough money to comfortably last you 20 to 30 years while you're no longer working.

To figure out how much money you need to save before you can retire, you'll want to first estimate how much money you'll spend each year in retirement. Consider costs like rent or mortgage payments, healthcare and long-term care costs, groceries, transportation, travel expenses and pet care (if you plan to have a pet).

Once you add up all your potential costs per year, you should consider approximately how much of that money you'll be receiving through federal benefits like Social Security. The Social Security Administration has an online benefits calculator that lets you estimate how much you might receive in social security based on your income now and when you hope to retire. Then, subtract your Social Security amount from your expected yearly expenses. Let's say you calculate your yearly expenses to be $45,000 and you expect $20,000 from Social Security each year; $45,000 minus $20,000 gives you $25,000 (the amount you'll spend out of pocket each year in retirement).

Then you'll just multiply that out-of-pocket amount by 25 (you can also divide it by 0.04; this is known as the 4% rule). The number you get is the amount of money you should aim to save before you retire. In this case, $25,000 times 25 gives you a target of $625,000.

6. Consider staying in the workforce for at least one more year

Sometimes, it literally pays to delay retirement by a few years. According to Kiplinger, for every year past your full retirement age of 67 that you remain in the workforce, Social Security tacks on an additional 8% in delayed-retirement credits until you hit age 70. In other words, the longer you wait to retire, the higher your Social Security payments will be.

Plus, working a little longer means you'll be able to save and invest little more money for when you do decide to retire.

When you near retirement or first enter retirement

7. Use the 4% rule to estimate how much money you can comfortably withdraw each year

You used the 4% rule to estimate a target retirement number, but you can also use it to plan how much money you should withdraw each year once you retire.

"The 4% rule was devised to figure out the largest percentage of your investments you can take out in the first year of retirement and still be highly confident that you won't run out of money," Young explained. "The rule assumes that you withdraw 4% of your investments the first year. Then every year afterward, you adjust your withdrawal to reflect the inflation rate. This way, you can continue the same standard of living throughout retirement."

Keep in mind that the 4% rule is a general estimate and depending on your circumstances and expenses, you may need to withdraw more or less. For a personalized withdrawal strategy, you should seek help from a Certified Financial Planner.

8. Work with a financial planner to feel more confident in your spending plan for retirement

Lastly, if you're still nervous about how much money you should withdraw in retirement and which investment accounts they should come from, you might consider working with a financial professional to quell some of those worries.

Financial professionals can usually do more complex calculations and projections for you, and they may be able to point out oversights in your plan and offer alternatives.

Bottom line

It's important to make sure you have enough money to cover all your expenses in retirement when you're no longer working. Much of that planning should begin as early as possible since you'll have several decades to build up your savings. But if you find yourself nearing retirement — or already in retirement — and you don't feel too confident about your spending plan, you might consider speaking to a financial professional who can guide you down a more confident path.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Information about Marcus by Goldman Sachs High Yield Online Savings has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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