Greetings! I trust that this finds you well and enjoying life.
Before you retire, take the time to figure out just how much money you’ll need for retirement. One of the biggest concerns for retirees is whether their retirement savings will last the rest of their lives– will they run out of money? Social Security is not the guaranteed source of retirement income it once was, and people generally don’t want to depend on public assistance or their children during their retirement years. Whether you might run out of money hinges upon several factors; how much money you’ve saved, how long you need your savings to last, and how quickly you spend your money, to name a few. You’ll be better off if you can tackle these issues before retirement by maximizing your retirement nest egg. But, if you are entering retirement and you still have concerns about making your savings last, there are several steps you can take even at this late date. The following are tips and ideas to help make sure you don’t outlive your money.
You may be able to stretch your retirement savings by adjusting your spending habits. You might be able to get by with only minor changes to your spending habits, but if your retirement savings are far below your projected needs, drastic changes may be necessary. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return.
If you have major concerns about running out of money, you may need to change your spending patterns drastically in order to make your savings last. The following are some suggested changes you may choose to implement:
• Consolidate any outstanding loans to reduce your interest rate or monthly payment. Consider using home equity financing for this purpose.
• If your home mortgage is paid in full, weigh the pros and cons of a reverse mortgage to increase your cash flow.
• Reduce your housing expenses by moving to a less expensive home or apartment.
• If you are still paying off your home mortgage, consider refinancing your mortgage if interest rates have dropped since you took the loan.
• Sell your second car, especially if it is only used occasionally.
• Shop around for less expensive insurance. You’d be amazed how much you can save in a year (and even more over a period of years) by switching to insurance policies that have lower premiums, but that still provide the coverage you need. Life and health insurance are the two areas where you probably stand to save the most, since premiums can go up dramatically with age and declining health. Consult your insurance professional.
• Have your child enroll in or transfer to a less expensive college (a state university as opposed to a private one, for example). This can be a particularly good idea if the cheaper college has a strong reputation and can provide a quality education. You could save significantly over the course of just two or three years.
Minor changes can also make a difference. You’d be surprised how quickly your savings add up when you implement a written budget and make several small changes to your spending patterns. If you have only minor concerns about making your retirement savings last, small changes to your spending habits may be enough to correct this problem. The following are several ideas you might consider when adjusting your spending patterns:
• Buy only the auto and homeowners insurance you really need. For example, consider canceling collision insurance on an older vehicle and self-insure instead. This may not save you a bundle, but every little bit helps. Of course, if you do have an accident, the amount you saved on your premium could be wiped out very quickly.
• Shop for the best interest rate whenever you need a loan.
• Switch to a lower interest credit card. Transfer your balances from higher interest cards and then cancel the old accounts.
• Eat dinner at home, and carry “brown-bag” lunches instead of eating out.
• Consider buying a well-maintained used car instead of a new car.
• Subscribe to the magazines and newspapers you read instead of paying full price at the newsstand.
• Where possible, cut down on utility costs and other household expenses.
• Get books and movies from your local library instead of buying or renting them.
• Plan your expenditures and avoid impulse buying.
If you’re trying to stretch your savings, you’ll want to withdraw money from your IRA as slowly as possible. Not only will this conserve the principal balance, but it will also give your IRA funds the opportunity to continue growing tax deferred during your retirement years. However, bear in mind that you must start taking required minimum distributions (RMDs) from traditional IRAs (but not Roth IRAs) after age 70½.
Don’t assume you’ll be able to live on the earnings from your investment portfolio and your retirement account for the rest of your life. At some point, you will probably have to start drawing on the principal. You’ll want to be careful not to spend too much too soon. This can be a great temptation particularly early in your retirement, because the tendency is to travel extensively and buy the things you couldn’t afford during your working years. A good guideline is to make sure you don’t spend more than 5 percent of your principal during the first five years of retirement. If you whittle away your principal too quickly, you won’t be able to earn enough on the remaining principal to carry you through the later years.
Your investment portfolio will likely be one of your major sources of retirement income. As such, it is important to make sure that your level of risk, your choice of investment vehicles, and your asset allocation are appropriate considering your long-term objectives. While you don’t want to lose your investment principal, you also don’t want to lose out to inflation. A review of your investment portfolio is essential in determining whether your money will last.
Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people totally shift their investment portfolio to fixed-income investments, such as bonds and money market accounts, as they approach retirement. The problem with this approach is that it completely ignores the effects of inflation. You will actually lose money if the return on your investments does not keep up with inflation. The allocation of your portfolio should generally become progressively more conservative as you grow older, but it is wise to consider maintaining at least a portion of your portfolio in growth investments. Although you will undoubtedly make changes to your investment portfolio as you reach retirement age, you should still bear in mind the basic rules of investing. Diversification and asset allocation remain important as you make the transition from accumulation to utilization.
If you have any questions or concerns about anything related to finance don’t hesitate to call me.
Jeff Christian CFP, CRPC