Smart people get a Medicare supplement plan to pick up some of the things Medicare skips. The most popular Medicare supplement insurance, called “Plan F,” costs $134 to $266 per month in St. Louis. Neither covers nursing homes.
Next, look at your income and savings. Add up your Social Security and pension payments. (Social Security no longer mails out annual estimates; you can get one from their website at ssa.gov.)
Subtract that from your expenses. The big number remaining is what you’ll have to make up from savings.
Do you have enough? To find out, think Monte Carlo. Not James Bond’s favorite gambling resort, the statistical simulation.
A Monte Carlo simulation takes the amount of money you have, looks at how it’s invested, and how quickly you plan to spend it. Then it runs your portfolio through hundreds of possible investment results — bull markets, growling bears and in between. It comes out with a percentage chance that your money will run out before you plan to die.
And just when should you plan to die? There is a 45 percent chance that one spouse will live to age 90. So, better use a higher age when calculating how long your money has to last.
You can find several Monte Carlo simulators on the Internet. The illustration below is from the simulator at T. Rowe Price, the big mutual fund company.
Take a 64-year-old couple, making $80,000 per year at retirement, with $500,000 saved for retirement, mainly in a 401(k). Their savings are invested half in stocks and half in bonds. Including Social Security payments, they can spend about $4,000 a month and have an 80 percent chance of having money left at age 95.
Reduce their income to $50,000 (which means smaller Social Security payments), and their savings to $100,000, and they’ll have to get along on $2,200 per month if they want an 80 percent chance of making it to age 95.
Simulations aren’t guarantees. They rely mainly on how stocks and bonds have behaved in the past, and make assumptions about the future.
Today’s rock-bottom interest rates are highly unusual, and could affect simulation accuracy. The low income from bonds and bank accounts makes it more likely that a retiree will be raiding his principal in the first years. That’s like eating the seed corn; it can lower future returns.
The rule of thumb used to be that retirees could spend 3 or 4 percent of their savings per year, and adjust that up with inflation. Low interest rates have made that rule much more risky.
Some advisors urge a three-bucket approach to investing your money. The first bucket is for money you won’t be spending for many years. That bucket contains mainly stocks. You’ll expect a higher return over the long run from stocks, but you’ll have some crashes along the way, too. The long horizon lets you ride out the bad times.
The second bucket is for money you’ll need in a year or more. That sits mainly in bonds, which are less volatile than stocks.
The third bucket is for near-term spending. It’s in bank accounts, short-term bond funds, money funds and the like. That bucket should hold perhaps a year’s worth of living expenses.
When the stock and bond markets slump, you live off money in the short-term bucket. When investments are doing well, you refill it.
Don’t be afraid of stocks, advisors say, but don’t fall in love with them. “If you’re going to live for decades, you need stocks for growth,” says Ott. But stocks lost half their value in 2008, and there have been five 20 percent drops since 1990.
Some retirees buy fixed annuities with their savings. These insurance company contracts guarantee a fixed monthly check for life. But today’s low interest rates make them less attractive. Keep them in mind if rates rise.
What if you just don’t have enough money to quit working? “Save more, spend less, work longer,” says Ott. “If you’re concerned, why don’t you just work another year?”
Your alternative is to live a little meaner in retirement — be the goose feeder rather than the traveling golfer.
Realize that retirement may come sooner than you think.
About 70 percent of Americans plan to work beyond age 65. But only 28 percent of current retirees actually did, according to the Employee Benefit Research Institute. In fact, most people knock off work before 65.
Nasty surprises — sickness and layoffs — force people out sooner than they expect. Happy surprises happen, too. At some companies, a lot of older workers have danced out the door with big severance checks.
So, for planning purposes, better figure you’ll retire at 65 or a little earlier.