Whatever your retirement dreams are, they can still come true. It just depends on how you plan and manage your resources. On any trip it’s helpful to have an idea of where you’re going, how you plan to travel, and what you want to do when you get there.
If this sounds like a vacation, well, that’s how it should be. Most people spend more time planning a vacation than they do something like retirement. And if you think of retirement as the next step in your life and approach it appropriately, you won’t get bored as easily or run out of money to continue the journey or get lost and make bad financial decisions along the way.
What counts is how you manage it
The amount you need really depends on the lifestyle you hope to have. And it’s not necessarily true that your expenses will decrease in retirement. Assuming you have an idea of what your annual expenses might be in today’s dollars, you now have a goal to aim for in your planning and investing.
Add up your income from sources you expect in retirement. This can include Social Security benefits (the system is solvent for at least 25 years), any pensions (if you’re lucky enough to have an employer-sponsored plan), and any income from jobs or that new career.
Estate Spending: Pretend It’s Like Harvard or Yale
Consider taking the same approach that keeps large organizations and donations running. They plan to stay in business for a long time, so they aim for an expense rate that allows the organization to sustain itself.
1.Discover your gap: Take your budget, subtract your expected income sources, and use the result as a goal for your withdrawals. Keep this number to no more than 4%-5% of your total investment portfolio.
2.Use a combined approach: Each year consider increasing or decreasing your withdrawals based on 90% of the previous year’s rate and 10% on the performance of the investment portfolio. If it goes up, you get a raise. If investment values go down, you have to tighten your belt. This works well in times of inflation to help you maintain your lifestyle.
3. Stay invested: You may be tempted to leave the stock market. But despite the rollercoaster we have experienced, it is still prudent to allocate a portion to equities. Considering that people are living longer, you might want to use this rule of thumb for your stock allocation: 128 minus your age. You should still keep at least 30% of your investment portfolio (not including safety net money) in stocks.
If you think the stock market is scary because it’s prone to periods of wild swings, consider the risk inflation will have on your purchasing power. Historically, bonds and CDs alone do not keep pace with inflation. Only stock investments have demonstrated this ability.
But invest wisely. While asset allocation makes sense, you don’t need to stick to “buy and hold” and accept being bounced around like a yo-yo. Your core allocation can be supplemented with more tactical or defensive investments. And you can change the combination of actions to cushion the effects of the roller coaster. Consider including stocks of large companies that pay dividends. And add asset classes that aren’t tied to the ups and downs of major market indices. These alternatives will change over time, but the defensive ring around their core needs to be re-evaluated from time to time to add things like raw materials (oil, agricultural products), raw material producers (mining companies), distribution companies (pipelines), convertible bonds and managed futures. .
4.Invest for income: Don’t just trust captivity They have their own set of risks compared to stocks. (Think about credit default risk or the impact of higher interest rates on your bond’s fixed income coupon.)
Mix up your bond holdings to take advantage of the characteristics of different types of bonds. To protect against the negative impact of higher interest rates, consider floating-rate corporate notes or a mutual fund that includes them. By adding high-yield bonds to the mix, you will also provide some protection against eventual higher interest rates. While they are called junk bonds for a reason, they may not actually be as risky as other bonds. Add Treasury Inflation Protected Securities (TIPS) which are backed by the full faith and credit of the US government. Add emerging country bonds. While there is currency risk, many of these countries do not have the same structural deficit or economic problems as the United States and developed countries. Many learned the lesson of the debt crises of the late 1990s and did not invest in the exotic bonds created by Wall Street financial engineers.
Include dividend-paying stocks or stock mutual funds in your mix. Large foreign companies are great sources of dividends. Unlike the United States, there are more companies in Europe that tend to pay dividends. And they pay monthly instead of quarterly like here in the United States. Balance this with hybrid investments like convertible bonds that pay interest and offer upside appreciation.
5. Build a safety net: To get a good night’s sleep, use a bucket approach by dipping into the investment bucket to replenish the reserve that should have 2 years of spending on near-cash investments: savings, tiered CDs, and fixed annuities.
Yes, I said annuities. This safety net is supported by three legs, so you’re not putting all your eggs in annuities, much less a term-specific annuity. For many this may be a bad word. But the best way to get a good night’s sleep is to know that your “must-have” expenses are covered. You can get relatively low-cost fixed annuities without all the bells and whistles of other types of annuities. (Although tempting, I would tend to pass on “bonus” annuities because of the long surrender charge schedule.) You can stagger your terms (1 year, 2 years, 3 years and 5 years) like CDs. To minimize exposure to any one insurer, you should also consider spreading them across more than one well-rated insurance company.
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