It would not be an exaggeration to say that saving for retirement has never been more challenging than it is now.
The National Institute on Retirement Security reports that most Americans do not have sufficient amount of money saved up for retirement and those who do have a nest egg are worried that they might outlive it.
With this being the case, it is important to have a flexible approach towards saving for retirement.
Here are four reasons why you should rethink and recalibrate your retirement funding strategy.
Growing costs of healthcare
It is no secret that the cost of healthcare has dramatically increased over the years. Health insurance premiums continue to go up and the cost of long-term care is not cheap either.
Even if you have a medical insurance plan and a long-term care plan, the out-of-pocket expenses alone can leave a dent in your savings in the event of an unexpected injury or illness.
What it means is that you might have to earmark a significant percentage of your savings for your healthcare expenses. You need to determine whether the remaining amount might be sufficient to live off of for the rest of your life.
If you think it might not be sufficient, you need to take steps to ramp up your savings.
Longer average lifespan
The average American can expect to live up to the age of 80 or even longer in many cases.
So, your retirement plan should consider the possibility that you could live until your mid-eighties or even beyond. It might require you to build a bigger nest egg than what you thought might be sufficient.
Reduction in purchasing power
Inflationary pressures in the economy can rise at any time, and it is important to account for the decrease in purchasing power over a long period of time.
Considering this reality, conservative investment options like certificates of deposits and treasury bonds might not be a good choice if you want to get higher returns in your golden years.
You might have to look at other options, such as stocks, commodities, and mutual funds, which can give you much better returns, despite the risks involved.
The chance of outliving your money
The golden rule of retirement spending is that you should not withdraw more than 4% of your nest egg on a yearly basis.
Under normal circumstances, withdrawing 4% from your portfolio should not be a problem, as your portfolio might generate sufficient income to make up for the yearly withdrawals.
However, if the market is down for an unexpectedly long period of time and bonds pay little, withdrawing 4% can erode your savings faster than you think.
This is one of the reasons why experts say that you should be flexible in your approach, rather than following a fixed withdrawal rule year after year.
For instance, when the market is down, you could withdraw less than you normally do and keep your spending in check until the market bounces back up again. This way, you can mitigate the risk of outliving your money.
