Use Conservative Estimates When Planning for Retirement

Be realistic and conservative with your assumptions for retirement.

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Roger Wohlner
What is a reasonable rate of return for your investments over the long term? How long will you live, knowing life expectancies are increasing? How much can you count on from Social Security and pension plans?

If you're concerned about running out of money during retirement, you need to be realistic and conservative with your assumptions. Here are some tips to consider:

Assume your needed retirement income will be at least 100 percent of your current income. Most rules of thumb suggest you'll need between 70 percent and 100 percent, but plan on at least 100 percent to be safe. Nowadays, retirees want to travel, pursue hobbies, and live an active lifestyle, which generally means you'll need the higher end of these estimates. Medical costs in retirement are likely to rise as well.

[In Pictures: 10 Key Retirement Ages to Plan For.]

Add a few years to your life expectancy. You should probably plan on living until at least age 85 or 90. If your family has a history of longevity, add a few more years to these figures. While you may find it hard to believe you'll live this long, you don't want to reach age 75 or 80 and find out you've run out of money.

Reduce your estimates of Social Security benefits. The Social Security Administration produces benefit statements every year around your birthday, telling you how much to expect in benefits. Social Security is currently in questionable financial shape, and the number of retiring Baby Boomers can only put further strains on this safety net. To be safe, count on benefits that are somewhat less than the Social Security Administration estimates, and don't plan on adjustments for inflation.

[See 7 Excuses for Not Saving for Retirement.]

Cut back on your living expenses now. This not only frees up money to set aside for your retirement, but it helps you adjust to a lower standard of living, which should also change your expected lifestyle for retirement.

Reach retirement with no debt. Mortgage and consumer debt payments consume a significant portion of most people's income. Pay off all those debts by retirement, and you'll significantly reduce your cost of living.

[See 7 Ways to Stay Ahead of Inflation in Retirement.]

Forget about early retirement. Saving enough to last from age 65 to age 85 or 90 is a difficult task. Trying to retire at age 55 or 60 is just not practical for most individuals, unless you're willing to significantly change your lifestyle. Working a few more years can go a long way in helping fund your retirement. Those years are typically your highest earning years, so hopefully, you'll save significant sums during that period. Also, every year you work is one year you don't have to support yourself with your retirement savings.

Consider working during retirement. Especially during the early years of retirement, you should consider having at least a part-time job. Even modest earnings can help significantly with retirement expenses.

[See 10 Things You Should Know About Your IRA.]

Plan on taking conservative withdrawals from your retirement assets. Don't plan on taking out more than 3 to 4 percent of your balance annually. Everyone's situation is different, but this is generally a sustainable level of withdrawals. It is best to start with a detailed retirement expense budget and then determine what your investments and other sources of income can support.

The best strategy is to have a financial plan in place, and then to monitor and adjust your strategy as needed.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.

Corrected 6/29/2011: A previous version of this story incorrectly stated that the Social Security Administration sends benefits statements.