The new post-Great Recession economy is taking its toll on the Baby Boomers and retirees. In this article, we cover five things people do which put them at risk of running out of money during retirement:
1. No measuring device. Imagine driving across the country with no fuel tank gauge. How often do you stop for gas? I suppose you’ll have to guess. If you approach retirement income this way, you can get yourself in trouble. You must have a monitoring system in place.
This type of system measures how much money you have left, your income needs, uses a conservative rate of return based on your investing style, and takes into account remaining life expectancy. Your retirement income gas gauge isn’t only there to tell you when to slow down – it can also tell you when there is room to step on the gas.
2. No spending plan. A reason people run out of money in retirement is they spend too much money, relative to the amount of financial assets they have. Sometimes, excess spending occurs as parents help adult children. Often, because an upcoming retiree forgot to calculate expected taxes or healthcare expenses in their retirement budget.
When you retire, make a spending plan which lays out your monthly and annual expenditures, including money for fun. Now, add up your guaranteed sources of income, like Social Security or pensions. The amount of living expenses in excess of your guaranteed income must come from your savings and investments.
Make a projection assuming you take the desired withdrawals, and see how long the money lasts. Now, make the same projection, but assume you spend $5,000 more or less a year. This type of modeling can show how small changes in your spending can make the difference between having enough money or running out of money.
3. Invest wrong. Your investment goal in retirement should not be to maximize returns, but to preserve principal. What most retirees want is a sustainable, lifelong income. This is not the time to go for the hot stock tip, nor is it the time to keep all your money in certificates of deposit. This is the time to learn about the various investment philosophies for retirement income and decide on the one most appropriate for you. Here are four approaches to consider:
- The income-only approach: You only spend the interest and dividends your investments generate.
- The systematic withdrawal approach: You build a risk/return adjusted portfolio with a target annualized rate of return of about 6 to 7 percent, while planning to take withdrawals of about 4 percent a year.
- The time segmentation approach: You match investments to upcoming cash flow needs, so your safe investments are used for spending in the first 10 years of retirement, and your growth investments can be left alone to accumulate for years 11 and beyond.
- The guaranteed income approach: You use annuity products to guarantee a lifelong income.
The secret to retirement investing success is to pick an approach and stick with it. Flip-flopping between investment approaches is bound to cause you harm.
4. No Plan B. Life throws curveballs, and it will continue to do so in retirement. If your plan requires you to use every asset you have, you’re at risk of running out of money. You need to allocate some of your assets to reserves – this means the asset is not available to meet living expenses in retirement.
Reserves can be an emergency fund account, home equity, cash in a safe, a piece of land you own, or even a valued collectible. Hopefully, you’ll never need to tap into your reserves, but you might need it for healthcare expenses later in life or to help an adult child. There’s no telling what might come up to throw your original plan off track. This is why you need assets set aside as Plan B.
5. Fall for the scam. There will never be a shortage of people trying to part you from your money. Countless times, I’ve watched retirees fall for scams which promised them outstanding returns. As you age, your ability to process complex financial decisions might decline. Unfortunately, you maintain a strong belief that you have the capacity to appropriately process such things. This is not a good combination.
Whether it is a family member or professional, you need a trusted advisor you can turn to before making money decisions. You’ll want to establish this relationship in your 50s or 60s. When faced with someone presenting you with an offer, this will enable you to avoid feeling pressured by saying, “I don’t make these decisions without consulting with my (trusted advisor name).” If it is a legitimate offer, the person presenting it to you should be happy to discuss it with your accountant, financial advisor or, the family member you rely on for help.
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