Start with Your Guaranteed Income
Almost everyone in the United States will have a certain amount of guaranteed retirement income, even though it may not be enough for you to completely depend on. The most common source of this income is Social Security. However, if you worked for a school or government agency, you may have a state or federal pension instead. In addition, you may have a private pension, an annuity, income from rental property or some other source of regular, reliable income. If you have not yet retired and your guaranteed retirement income seems to be very small, you may want to work a few more years in order to enhance the amount of guaranteed income you will have for the rest of your life. At age 70, workers will have maxed out the amount of Social Security benefits they can receive; at age 65, their spouse will have maxed out the amount they can receive in spousal benefits. There is no point in waiting to collect your benefits past these ages.
If your savings and assets are limited and your Social Security or other pension is small, arrange a personal appointment with someone in your local Social Security office and with your Department of Social Services. You may be able to increase your guaranteed basic income and benefits by qualifying for Supplemental Security Income (SSI), SNAP (food stamps), or low-cost senior housing assistance. These extra benefits are available to low income citizens and you have paid for them through your taxes, so there is no reason not to take advantage of them. If you qualify, they can go a long way towards helping you have a modest, but survivable retirement.
Total Up the Amount in Your Savings and Retirement Accounts
Once you have worked as long as possible and secured the highest level of Social Security benefits you can, it is time to evaluate how to make the money in your retirement savings accounts last the rest of your life. If you have been saving a portion of your income in a 401(k) or IRA during your working years, you will be able to use income from that money to supplement your Social Security, pension or other sources of guaranteed income. Total up the amount of cash you will have to work with upon retirement.
In addition to the money in your retirement savings accounts, you may decide to sell your current residence and downsize to a smaller home when you retire. In some cases, this move may also give you extra cash which can be used to supplement your retirement income. There may also be other non-income producing assets you can sell, such as coin collections, jewelry you no longer wear, or similar valuables. Pool together all the cash you can, total it up, and see how much money you will be able to put to work.
Set Aside a Cash Cushion
Take a portion of your cash savings and set it aside for emergencies, upcoming expenses, or large medical bills. If you live another 20 to 30 years after retirement, it is likely you will need to tap into this cushion occasionally to cover surprise bills you may have above your normal monthly expenses. Sooner or later, you may have to replace a hot water heater or pay a large medical deductible, and you want to be prepared. You do not want to deplete your other assets in order to do this. Use this emergency cushion carefully. You should avoid burning through it during the first few years after you retire, especially on something like a big trip.
If there is a dream trip you want to take after you retire and you feel you can afford it without wiping out your retirement savings, set aside some travel money at the beginning of your retirement and do not exceed this budget. Remember, it will be difficult, if not impossible, to replace any money you spend after you retire. Use those funds carefully.
Invest the Remainder of Your Cash
Jane Bryant Quinn, the AARP expert, recommends that the ideal way to invest your savings and assure yourself of an income for the remainder of your life is to invest half of it in low-cost index mutual funds or exchange-traded funds that hold stock in large companies and put the other half in Treasury bond funds. (As an aside, this blog has reported in the past that Warren Buffet also recommends that retirees invest a substantial portion of their retirement savings in low-cost index mutual funds. It seems like good advice for most people.)
If you are unsure about which investments would be right for you, you may want to purchase Jane Bryant Quinn's book, "How to Make Your Money Last." It offers excellent advice.
Follow the Four-Percent Rule
The four-percent rule is one which many financial experts recommend for most retirees. This system allows you to use four percent of your retirement savings the first year after you retire. You can increase your withdrawal rate by the amount of inflation each year. For example, if you have $100,000 invested, you can spend $4,000 the first year. Then, increase the amount you withdraw by the inflation rate for that year. If inflation is 3 percent, you can withdraw $4,120 the next year. Even if the market has ups and downs, this system should assure you that your money will last 30 years or longer, because your withdrawals will be at least partially replaced by the dividends and interest you receive on the principal.
If you decide to avoid the stock market and put your money only in bonds and CDs, you will have a lower return and may have to change the four-percent rule, discussed above, to a three-percent rule. This works exactly the same, but you start with a lower withdrawal rate of 3 percent. In other words, for every $100,000 invested, you can withdraw $3,000 the first year. If inflation is 3 percent, you can withdraw $3,090 the next year. This very conservative approach is another way to assure yourself that you will have supplemental income for the remaining years of your life.
The one thing you do NOT want to do is to begin retirement by taking more than four percent from your retirement savings, unless you have stock investments which are doing exceptionally well and you feel certain you are not putting your future financial security at risk. Even then, you should not take more than 4.5 percent. If you withdraw more than that, you must be prepared to also cut back your withdrawals during times when the stock market falls. If you do not want your income to fluctuate in this way, stick to a withdrawal rate of 4 percent or less.
Rearrange Your Lifestyle to Fit Your New Income
Now that you know what your income will be from your retirement savings, add that to your Social Security or pension. Compare the total to your realistic retirement budget.
If your Social Security and other guaranteed income, when added to four percent of your retirement savings, totals less than your current income, you may have to make some changes to your lifestyle.
As mentioned above, you may need to downsize to a smaller, less expensive home. The advantage of this is that other housing related expenses, such as property taxes, utilities and maintenance, would also be lower.
You and your spouse may also find it advisable to adjust to sharing one car, or one of you may decide get a part-time retirement job. You need to make adjustments so your retirement expenses and income match.
If it seems impossible to match your income to your desired lifestyle at the age when you planned to retire, you may decide it would be best to wait to retire until you have paid off your mortgage or until your Social Security benefits or pension would be larger.
It will be much easier and less stressful to start out retirement with a lifestyle which fits your new income, rather than try desperately to maintain your current lifestyle, even when your income and assets do not justify it. A few hours of planning will save you years of grief in the future.
Make Sure a Surviving Spouse can Maintain this Lifestyle
What happens when you or your spouse passes away? Will the other spouse be able to survive financially? Before you finalize your retirement plans, make sure both you and your spouse will be financially secure even after one of you dies. Calculate the guaranteed survivor income plus the investment income each of you would receive individually after the death of a spouse. Make sure this reduced income will cover the fixed expenses each of you would still have for items such as mortgage payments, property taxes, utilities, car payments, food and medical bills. If the income of either of you would not be adequate to survive individually, come up with a plan to compensate for the difference.
You may want to start your retirement off by spending even less than the 4 percent rule would allow. This would allow your assets to grow. Purchasing life insurance policies might also be an option for some couples. Plan ahead and decide how each of you will deal financially with being widowed. This will reduce some of the stress when the time comes.
Jane Bryant Quinn goes through all this in even greater detail in her helpful book, available here from Amazon, "How to Make Your Money Last."
Relax and Enjoy Your Retirement
Financial worries have been shown to increase the risk of death, so it is important for every couple and individual to carefully evaluate their situation before retirement. Once you have made the necessary adjustments so you are confident your money will last the rest of your life, you will be able to relax and truly enjoy your remaining years.
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