Your vision is of a white sand beach, you’re in a lounge chair sipping an exotic drink, watching the waves slowly roll in as swimmers frolic in the aqua clear waters. Then you wake up. You immediately remember you fell asleep struggling with feelings of euphoria and panic as you begin the next phase of your life called RETIREMENT.
We all want to enjoy our retirement years with as much vigor and as little stress as we can muster. While I can’t help much with the vigor, a few financial tips on how to live in retirement may help to reduce the stress.
Tip #1: Invest wisely. Allocate your investment portfolio across stocks, bonds, cash in proportions that reflect both your tolerance for risk and your financial position. For instance, you may have a very low tolerance for taking risk with your money. Based on that alone, you might be comfortable with a very small or no portion of your retirement money in the stock market. Now review your financial position. Based on your current spending habits, you plan to spend, or are currently spending, 8% of your portfolio annually. That mean in order to maintain the principle balance your portfolio needs to earn 8% + some inflation factor of let’s say 3% per year, or 11% annual rate of return. That won’t happen invested in cash and bonds. Over the long term cash has returned about 3%, bonds 5%, and stocks 10%. In the short term, returns vary dramatically from year-to-year, putting stress on you and your finances during retirement. So what do you do? You might start by reducing your spending habits. But that’s not my point in Tip #1. Find the right balance in allocating your money between stocks, bonds, and cash so the volatility in your stock investments will be offset by the more conservative and stable investments in bonds and cash. Stocks add a long-term growth element to the portfolio which is needed to increase the probability your money will live has long as you do. The following are some sample retiree portfolio allocations to consider:
Preservation Portfolio: This is probably best for retirees who stay awake at night worrying about losing money. It’s more appropriate for people with a shorter time horizons–say less than 10 years. By “time horizon” I mean life expectancy.
15% Stock
60% Bond
25% Cash
Conservative Portfolio: If you expect to live at least 10 years and you don’t like taking a lot of risk.
30% Stock
55% Bond
15% Cash
Moderate Portfolio: Retirees who expect to live more than 10 years and have an appetite for some risk, may want to consider a larger allocation to stocks.
60% Stock
35% Bond
5% Cash
Aggressive Portfolio: Do you expect to live 20 years or more? Is your spending flexible enough that you could reduce expenses during down markets? Do you have another source of income, such as a pension, that you can rely upon if the markets are negative for two or more years? If so, you may be a candidate for the Aggressive Portfolio.
75% Stock
20% Bond
5% Cash
Even the most aggressive portfolio does not have 100% stock. Some retirees may have a level of wealth that no matter how they invest they will never run out of money, think Bill Gates. Most retirees should not be risking their entire nest egg in the stock market. You will also notice that the portfolio with the least risk includes some stock. That is to maintain some potential for growth. There is uncertainty in knowing how long we will live. Even a preservation portfolio may need to last longer than we initially thought. You want living longer to be considered a good thing.
Tip #2: Minimize your fixed costs.
Flexible spending during your retirement years will put you in control. If you have the control to reduce expenses and draw less from your portfolio when the stock market is doing poorly, then your dollars will last longer. Wait until the markets have plumped up your funds with good returns before buying those cruise tickets. For many, the mortgage is their largest monthly fixed cost. Focus on paying it off. Or downsize to a smaller, less expensive house. If there’s equity left over, invest it. Pay off your credit card debt.
Tip #3: Don’t retire….. recreate your life.
For many retirees working after retirement will not be a choice. It will be necessary. Living in retirement for maybe 20-40 years is a very long time. If there’s a pretty good possibility you may outlive your finances, take a year or so to live the retirees dream, then create your next life phase. This could be your opportunity to do something you are good at but couldn’t make enough money from it to support yourself and your family. Now the financial need isn’t as great, so go for it. Take Dick and Nancy. Dick taught painting before he retired and Nancy worked in art museums. In their 70s now, they live 6 months in Italy where Dick paints the landscape and sells his art work to tourists. Nancy authors books on artists and writes travel guides of Italy that include Dick’s art work. How about Steve, a man who can fix anything. He has fun socializing a few hours each week at a hardware store where he helps make home and landscape projects less daunting for those with lesser experience. The extra cash, social enjoyment, and mental activity keep him young so he can continue to enjoy four days a week at a lake home with family and friends.
Recreate a life that makes you happy!