Financial advisers will tell you that the most telling --and risky -- years of your retirement are the fivebefore you leave the 9-to-5 world, and the five afteryou have forsaken a steady paycheck and learn tolive on Social Security, perhaps a pension, and alifetime of wealth accumulation through a retirementplan. Indeed, making your money last as long as youand your spouse do consistently shows up as thebiggest worry among folks approaching or inretirement.
To help you with these vexing questions, we askedcredentialed financial advisers and attorneys to sharewith you the advice they give to their clients. Here areeleven insights from the pros.
The biggest secret lies long before retirement
Falling into the consumption trap can kill anyone'schances to make it through retirement. It's toughenough to save what's needed for retirement. Poorspending habits are a key factor. Those trying to saveenough to retire would be wise to remember that theirfuture selves will appreciate their restraint in theiryounger years. It's a simple concept, but often hard toexecute.
Have a realistic expectation of how long you'll live
How long do you need to plan for your retirement? Alifetime, of course. But how long is that? You could trythe calculator from the Social Security website, but itwill only give you an "average" life expectancy, andthe problem with that is if you used that number foryour planning, you could have a 50% probability ofoutliving your savings.
So, what are the alternatives? Here are a couple ofoptions. One option is to make your best judgment ofyour life expectancy projection based on your health,family history, etc. After all, no one knows yoursituation better than yourself! Otherwise, use toolssuch as the "living to 100" calculator, which takes yourethnicity, family history, health habits, etc., intoconsideration and generates a more customized lifeexpectancy for you.
In either case, the more accurate your life expectancyprojection, the more accurate your retirement plan willbe, and the less likely you will outlive your assets!
Have a stash of cash and bonds
Keep a certain amount of your investment portfolio incash and bonds, like one to three years of cash in thebank and an additional three to five years ofinvestments in bonds to cover living expenses.Here's why: If the stock market craters, a person with five to 10 years of living expenses in cash and bondscan not only cover their expenses, but also preservetheir investment portfolio as they are not forced to selltheir stocks at temporarily low values. This strategy helps to provide peace of mind.
Be honest with yourself about how much you really need to live on once you retire
Ron and Rhonda Retiree have what they feel is ahuge amount of money for retirement but have doneno planning. They tell us they can live on X amount oftheir retirement portfolio each month. So, we do acash-flow analysis and estimate that the amount theywant, let's say around 5% annually, is sufficient fortheir needs.
But then it starts -- the calls to the office for extrawithdrawals. It seems they forgot to include someregular expenses -- the long-delayed weekend jauntsor the maintenance on the boat or annual golf outings.They didn't consider them a regular expense when wedid the cash-flow analysis.
The result: A cash flow need estimated at 5%annually turns into a 7%, 10% even 15%. Burningthrough 5% a year was doable. But 15% is notrealistic.
To be safe, consider a modified 4% withdrawal rule
Many people are familiar with the “4% withdrawalrule,” which assured retirees that by holding theirannual withdrawals to 4% of their retirement portfoliosit would allow their portfolios to last 30 years.However, that advice appears outdated and overlyoptimistic. A “Low Bond Yields and Safe PortfolioWithdrawal Rates” report by Morningstar found thatthe modified 'safe' withdrawal rate is 2.8%, and aretiree would be more than 50% likely to run out ofmoney withdrawing 4%.
Retirees should follow the modified 4% rule andreduce the amount for withdrawals from theirretirement accounts every year after big losses orgains in their portfolios, inflation, and othercirc*mstances.
Make sure to maximize your social security benefits
Now, more than ever, it's important for retirees tomaximize their Social Security benefits. It's aguaranteed income stream that you've earnedthrough your years of hard work.
But you have to know how and when to take SocialSecurity to maximize your benefits. Most people areamazed to learn there are more than 500 differentclaiming strategies and more than 2,000 governingrules. There are strategies for married couples,divorced couples, domestic partnerships, and widowsand widowers. Some are simple and straightforward,and some can be complicated and include multiplesteps.
You can't afford to go too conservative with your investments
Retirees face a tough decision-making process whenit comes to their financial assets. On the one hand,you likely want to be able to generate income for aslong as possible. On the other hand, you probablywant to know that your savings are safe.
To balance these competing priorities, you may needto take on more investment risk than you wereexpecting.
Think about it this way: If your investments aregrowing at a low but steady rate that just barely keepsup with inflation, you won't see your investmentreturns fluctuate much, but you'll be losing moneyevery year with account withdrawals. In other words,there is a real risk that you'll outlive your assets.
A Monte Carlo Analysis might calm your fears
Named for the gambling center in Monaco, a MonteCarlo Analysis is essentially a forecasting model thattakes as many variables into consideration aspossible, then runs repeated simulations to determinehow likely it is for this or that outcome to result from agiven enterprise.
In terms of your retirement, a Monte Carlo Analysischecks whatever givens are present in your financialsituation, then makes projections by taking as manymarket probabilities into account as possible. It also assesses the likelihood that you will achieve yourfinancial goals. Typically, these probabilities includethings like interest rates, years until retirement,spending habits and the diversity of your investmentportfolio. The result is a representation of your mostand least likely outcomes.
Consider long-term care insurance
A major reason most people fear running out ofmoney in retirement is an unknown major expense,which is primarily the cost of a health issue, such ascancer, a heart attack or a stroke.
Alas, there are a limited number of quality companiesoffering this insurance, and health qualificationscontinue to narrow while premiums have been rising.
Don't forget about inflation
Inflation is a risk that most people simply don't fullyconsider. Even with a 3% average annual inflationrate, the purchasing power of a dollar will fall by morethan half, after 25 years.
As you spend down your retirement savings, inflationis costing you more money to live. Retirees shouldunderstand the long-term cumulative impact ofinflation on their portfolio during retirement.
If you're feeling unsure, easing into retirement could be the answer
Retirement planning in the 21st century is not an allor-nothing proposition. If you expect to live till 100,and if you fully retire at 65, you'd end up having 35years of retirement! That is a long period of spendingwhile not earning. Not ideal for your financial wellbeingor your personal well-being!
So, here is something to consider: Phase intoretirement gradually. In other words, do not turn onthe full-stop retirement switch yet. See if you canscale back and work fewer hours in your current job.Alternatively, consider working part-time at a lowerstressjob. Or pick up consulting work. Or be your ownboss and start a business.
