Avoid running out of money in retirement

Focus on saving steadily
Focus on saving steadily © Yuri Samsonov/

Those still in the workforce can avoid running out of money in retirement by saving steadily throughout their careers.

In another study by Pfau, he found that you are likely to be better off by focusing on saving at a steady rate during your working years, rather than on a withdrawal rate after retirement. The conventional approach is to try to accumulate a certain target wealth amount that will help you withdraw at a specific safe and sustainable withdrawal rate -- say, 4 percent -- from your portfolio in retirement.

Pfau says, considering that a portfolio of stocks and bonds tends to be volatile, it means you can't safely say where you will end up. "Instead, look at savings rate, which, because of its mean reversion, tends to be much less volatile in terms of what consistently works historically," says Pfau.

There is no universal savings rate that applies to everyone, and you can figure out what works for yourself. However, a baseline of 16 to 17 percent might be a good starting point, Pfau finds.

Another disadvantage with focusing on a safe withdrawal rate is that this rate, if it is set during a time when portfolios are benefiting from a long bull market, is not likely to be sustainable.


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