People planning to retire in the near future, as well as pre-retirees, will likely have to navigate choppy waters during these times. A plummeting stock market, a slowing economy, and a Federal Reserve that has signaled further interest rate hikes to fight inflation are forcing retirees to make smart decisions to avoid jeopardizing a successful retirement.
This is where a well-thought-out financial plan can help make a comfortable retirement possible, even in tough economic times. When I speak with recent retirees or people planning to retire soon, here are three actions I typically recommend to help them through this major life transition.
1. Review your spending history.
Many people don’t keep a family budget during the earning years of their career. They also don’t want to live on a strict budget in retirement, so I use a different approach: we add up all annual expenses over the past three years to look at macroeconomic trends in spending habits. Anyone can do this by collecting all credit card and bank statements to find spending averages.
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The purpose of this exercise is to see if this spending trend is sustainable for the next 30 years after retirement. A person or couple must be able to afford to live off their savings portfolio and secure sources of income, such as social security benefits.
Plus, most new retirees quickly realize that they need to fill their days with at least one major activity – and that usually costs money. In the first two years of my retirement, I saw my clients spend large sums on home renovations, as well as things like international and domestic travel in an RV. Some hobbies, like restoring a classic car, can easily run into the tens of thousands of dollars and be financially taxing.
If expenses need to be cut, there may be easy solutions. These may include reducing automated monthly subscription payments, increasing home and auto deductibles in exchange for lower premiums on insurance policies, off-season travel, and completing certain home improvement projects. instead of hiring professionals.
Some may be bigger changes – people may decide to downsize their homes or consider selling additional cars to save even more money.
2. Develop a plan to survive a falling stock market.
Worry during uncertain times is normal. But those with a comprehensive financial plan should be able to get by without making costly mistakes.
Selling investments at a loss is often based on fear. Most financial advisors know someone who sold their stocks when the market fell in March 2020. But the markets quickly reversed course and set records for nearly the next two years. A person with millions in investments who sold their shares and lost 20% of their value often blocked their losses, thus missing out on reaping the potential benefits of market gains in the process of recovery.
As a potential recession approaches, one of the ways I help prepare clients for retirement income planning is to create a bond ladder.
A bond ladder allows someone to buy a variety of individual bonds with different maturity dates – the date an investor receives the interest payment on their bond. For example, a person could invest $100,000 and buy 10 different bonds with a face value of $10,000 each. Because each bond will have a different maturity date, an investor will have a steady stream of guaranteed income if held to maturity. High-quality bonds that are held to maturity can provide a household with a steady stream of income for years to come.
3. Understand that you will need enough money to last 20-30 years.
Many people in their 60s who plan to retire with between $1.5 million and $5 million in investment assets can feel comfortable. But often they don’t know if their money will last them at least two decades or even longer. By building a plan based on different statistical models, a retiree is able to define their sustainable rate of withdrawal, including longevity risks.
The US population of people aged 90 and over nearly tripled between 1980 and 2010 to 1.9 million and is expected to grow significantly over the next four decades. This means that new retirees will need enough money to live comfortably for a long time and may not be able to leave money to their heirs.
Each plan is different to meet the needs of an individual or a couple. But all should help determine a sustainable withdrawal rate from an individual or couple’s portfolio that will last a lifetime and meet their financial goals. For example, some couples may want to spend every penny, while others may want to leave some to their heirs. Each plan is designed to withstand the stress of events that create uncertainty, such as a recession or a major geopolitical event.
I regularly work with clients in difficult times who are planning to retire or who have just retired, and I help them segment assets into money slices so they can ride out market volatility and be equally prepared. to take advantage of growth opportunities when the market recovers. Being intentional about a retirement income strategy is key to reducing emotional fears because the spending phase of life is very different from the hoarding mindset.
Hard times may be ahead. But with a thoughtful spending plan and a strategic retirement income plan that has been stress tested using statistical models, it may still be possible to retire with confidence in a volatile market. .
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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