Many people are worried about their retirement from a money perspective. According to a survey by Transamerica, most workers think the financial challenges they’ll face in retirement will be harder to overcome than those that prior generations faced.
The dwindling number of pensions, the uncertainty of Social Security and the volatility of investments give credence to workers’ concerns about the time when they’ll no longer be working. Even many of those with substantial nest eggs saved worry that those won’t be enough, with healthcare costs and increasing longevity also relevant worry factors.
Given that list of unknowns, protecting what you have, and doing so by reducing your financial risks, is crucial to reducing your money-related stress in retirement, says Richard W. Paul, author of The Baby Boomers’ Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead.
“You leave behind the security of a monthly paycheck and hope that your savings will be enough to pay your monthly bills, but there are certainly many unpredictable events that could go wrong,” Paul says. “Two of the worst things you can do when retirement planning is to depend on luck and to not consider future adjustments in lifestyle.
“You can have a good retirement with common-sense planning that takes risk out of the equation and puts more relaxing into the time you planned to do just that.”
Paul lists four ways to reduce financial risks in retirement:
- Don’t lean on equity funds. Leaving your retirement account in a heavy allocation to equity funds subjects your retirement to what Paul refers to as “luck of the draw,” or investments being vulnerable to a bear market. “This is a common mistake,” Paul says. “The typical retiree spends their working years automatically investing a portion of their paycheck into their 401(k) or other retirement plan, but the problem is, they fail to make a change when approaching retirement. You want to reduce the risk of a major recession or lost decade ruining your retirement plan.”
- Factor in inflation. Inflation brings an especially adverse effect because it can erode the purchasing power of your savings. “In retirement planning, many don’t account for this, but the good news is inflation is not spread evenly among all types of expenses,” Paul says. “The costs of healthcare and rent tend to go up every year, but you can help bring other costs down, like entertainment. You can also keep some of your savings in investments that have historically kept pace with inflation.”
- Plan disciplined withdrawals and spending. Many studies of safe withdrawal rates assume a retiree spends annually 3 to 4 percent of the portfolio balance upon retirement. “But in the real world,” Paul says, “your spending will fluctuate, and you have the ability to decrease it when you need to. By monitoring your portfolio value and reducing your spending when market values take a dive, you can reduce your chances of spending down your savings too quickly.”
- Balance your portfolio. “You can’t assume a certain return amount on your portfolio every year due to the volatility of investment returns,” Paul says. “Reduce your risk by increasing the proportion of your portfolio that is invested in more conservative assets that are less likely to lose value. Add more predictable income streams, such as bonds.”
“You want to exercise caution,” Paul says. “People are living longer and worrying more about their money running out. Protecting what they have requires careful planning well before retirement and paying attention to factors that require adjustments.”
***
Richard W. Paul is the president of Richard Paul & Associates, LLC. He is a Certified Financial Planner, Registered Financial Consultant, Investment Adviser Representative and an insurance professional holding life and health insurance licenses in Michigan and Florida.
Photo Credit: stock photo
TnAndy says
We don’t have a formal stock/mutual fund portfolio as such. Having been in the market with both from the mid 80’s to around 2005, and watch the shenanigans played there, we decided the main purpose of the stock market is to enrich the few at the expense of the many. It is a game designed to separate the money of most “investors” and transfer it those well versed in how to do so.
Can one do well there ? Sure, if the timing is right. But having seen the crashes, and given the potential for a huge, long term reversal right now, it seems the odds don’t favor anyone planning on needing it as a source of retirement funding.
Our retirement plan, current in effect, consists of couple approaches. My wife spent 32 years as a public school employee here in East Tennessee, and receives a monthly retirement from a defined benefit plan. Combined with both our social security incomes, we make a decent retirement income….enough that we can still save at least 20%/month.
The second prong of the plan was to reduce expenses. We did this beginning years ago buying a small mountain farm and building the infrastructure which provides us with a good portion of our food, most of our energy (solar/wood for heat), spring water, private septic system….so our monthly ‘nut’ runs less than $1,000/mo mainly for insurances, property taxes (fairly low, $1400/yr) phone, satellite TV.
The third prong is a good stockpile of precious metals.
Len Penzo says
Well done, Andy! You are very fortunate to be able to save 20% of your income per month. And I agree with you on the stock market … the game is certainly rigged against the little guys.
MaryAnn says
TnAndy- how old are you guys? Are you going to do all that into your 80’s? Also- where do you live exactly that you spend so little per month on property and school taxes and so on? Most people do not have pensions, so most cannot live just on SS or save any money after they retire. They need to depend a little on equities as savings accounts earn such little interest.
Don says
Hi Len,
I’m in my early 40s and unfortunately companies have gone away with the traditional pension plans. Although, we get an additional 2% into our 401k match for the lack of a pension.
What I do is invest 25% of my 401K portfolio in a mix of bond funds as a virtual pension. I plan that when I reach the age of 50, I’ll up the money market/bond mix to 40% and adjust from there as I keep working.
I think one of the most important plans later in life is to keep debt and spending low, like focus on paying off the mortgage and big ticket items. You really don’t need an extreme amount of money to live a normal lifestyle. Especially if you and your spouse are collecting SS and payments from 401k.
I want to retire by 62 —- as soon as I can tap into SS and 401k retirement funds without penalty and enjoy life!
Does this sound like a good plan?
Optinsure says
Should I prefer a social security plan over the annuity insurance plans for a comfortable retirement?