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Will Your 401K Last as Long as You Do After Retirement?

We all imagine a future for ourselves in which we live out our senior years comfortably, financially secure with our various savings. There’s a small problem here, we’re just imagining it – with rising inflation and a fluctuating economy, savings today won’t necessarily be worth as much in the future!

When it comes to planning your retirement, traditional 401K investments usually make the most sense. You don’t pay taxes on them until you start withdrawing them and you get some attractive investment opportunities. When it’s time to start withdrawing, though, it’s unlike a pension plan where you get a fixed income every month.

What should I do with my 401(k)? This dog will tell you [Infographic] - An Infographic from The Empowered Dollar

Embedded from The Empowered Dollar

Calculating how long it’ll last you is a bit more complex, so let’s take a look at how that can be done.

Calculating How Much You’ll Need in Retirement

When you’re planning the financial requirements of your retired life, increasing your 401(k) investments early on is the safest way to go. Estimating your financial needs in the future is also something you’ll have to redo every few years, so adjust your 401K contributions accordingly.

Some factors you should pay attention to are:

  • Life Expectancy – Discussing your family medical history and personal health records with a doctor can give you a basic idea of long you can expect to be around. The Internet is overflowing with information and various calculators for this, but all the fancy algorithms in the world can’t accurately predict an earthquake or a storm two decades away, let alone a person’s longevity!
  • Taxes – You will be paying taxes on your withdrawals and even penalties if you need to tap into your retirement plan early. Your calculations should account for deductions if you think you’ll need early withdrawals, and you should factor in the possibility even if you think you won’t.
  • Inflation – What sounds like a good nest-egg today, won’t hold the same value even a few years from now. Over just the last decade, inflation has seen peaks as high as 4.1%, and the upward trend seems poised to remain alarmingly high.
  • Healthcare – As you grow older, visits to the hospital are going to become more frequent. While the future of healthcare is uncertain, it’s a good idea to plan for increasing costs of medical care and associated insurance premiums, if any.
  • Interest Rates – The 2008 financial crisis crashed interest rates to an all-time low and while you can factor them into your retirement savings, don’t under or over-estimate them either. Err on the side of caution – if you have a loan that needs to be repaid, stay prepared for the rates to go up, and vice versa for savings in any retirement plan.

Improving your Odds

A few small changes today could help you live out your retirement peacefully, without being forced to live on a constrained budget. These include:

  • Aim for Higher Returns – The 401(k) investments your employer offers aren’t the only options you have. If you’re earning enough, consider a Roth 401(k) and see how that affects your savings. It’s probably best to max out your pre-tax first, since income from after-tax Roth contributions is tax-free after you’re 59 ½, provided you’ve had the account for at least 5 years.
  • Get help if you need it – Unless you’re well-versed in reading the economy and its implications, your predictions may end up being wildly inaccurate. Getting expert advice to help you with your plan is always a good idea. If you can’t find it for free, consider working with a qualified and experienced financial planner or a professional company.
  • Keep pace with changes – There’s a wealth of knowledge out there and experts often explain reforms in articles, interviews and blog posts. Keep track of changes in the financial world and predictions for the future, so you make the most of your 401(k) investments accordingly.
  • Consider post-retirement employment – If all else fails and it looks like your savings won’t be enough, continuing to work after retirement may be the only option that works. Try and decide long before you actually leave your job, because it’s easier to keep working than to get back to it after a break!

When you’re planning your future, it’s always better to have a little more, than ending up with less. If you’re lucky, you’ll have some surplus funds that you could use to fulfill your bucket list, take a long vacation or leave something behind for the next generation. Stay conservative with the numbers and always plan for ‘having less and needing more’!