Seven Strategies to Make Your Money Last Through Retirement

The Number One fear of retirees is outliving their money, followed closely by not being able to meet the basic financial needs of their family.  In other words, “How To Make Your Money Last Through Retirement”.  Today’s article from The Retirement Manifesto will look at strategies for withdrawals during your retirement to minimize the chance of running out of money.

According to a recent survey, the biggest retirement fears (by a sizeable margin) relate to being able to financially cover your expenses once the paychecks stop flowing.  The summary of the survey is shown below:

To best address these fears, it is critical to understand various withdrawal strategies for creating your required retirement income from your portfolio.  Following are seven strategies you should consider to tilt the odds in your favor.

7 Strategies To Make Your Retirement Savings Last

1. Maximize Your Savings

The focus of this article is on post-retirement income.  However, the first and most important strategy is to maximize how much you’ve saved prior to retirement.  If you’re running behind plan, don’t retire until you have a sufficient investment portfolio to fund your retirement.  Once you’ve left the workforce, it’s very difficult to reverse course and find a position paying the income you were making before you retired.  Be patient if necessary, and start from the strongest possible base.  Save as much as you possibly can, and seek the counsel of a Certified Financial Planner to insure you’re ready to retire.

2. The 4% Rule

Don’t withdraw too much from your portfolio in any given year.  While the historical “rule of thumb” has been to limit your early retirement “paycheck” to 4% of your investment base, be cautious.  A better assumption to insure you outlast your money is to start at a 3% withdrawal rate if at all possible given today’s low interest rate environment.  For every $1 Million saved, you should only “pay yourself” $30,000 (3%) to $40,000 (4%) of post-retirement income.  For the sake of this article, we’ll assume your first year’s withdrawal will be in the middle range, at $35,000.

3. Adjust Your “Retirement Pay” Annually

Historically, the rule of thumb has been to start with your “Year 1” withdrawal rate and increase it by the rate of inflation.  For example, if your Year 1 was $35,000 and inflation was 3%, you could increase Year 2 to $36,050 ($35,000 X 1.03).  However, new studies on increasing the odds in your direction now favor a new approach:

• In A Bear Market – take a pay cut
• In A Bull Market – give yourself an increase

For my family’s retirement strategy, we’re intending to update our net worth annually.  (See my article on net worth HERE, and my net worth statement template HERE).   Once I have my “new” net worth value, I’ll multiply that by a “safe” withdrawal rate (3.5% in our example) to determine the next year’s paycheck.  For example, if our $1 Million portfolio changes, we’d do something like this:

• Bear Market:  $900k   Paycheck reduces to $31,500  ($900k X 3.5%)
• Bull Market:  $1.1 M   Paycheck increases to $38,500  ($1.1 M x 3.5%)

In the unfortunate situation of a bear market and a pay cut, we’ll have to cut back our non-essential spending for a year to insure the long term outlook of our money lasting longer than we do.  It’s easier to make small annual adjustments than to realize at age 85 that you no longer have sufficient money to cover your base spending requirements.

4. Minimize The Tax Bite

The scope of tax strategy is beyond the scope of this article, but realize that how you withdrawal funds from various account structures can significant affect your spending needs in retirement.  Since taxes must be funded by the same portfolio now providing your paycheck, any reduction in tax provides more funds for your living expenses.  In general, a retiree should look to spend after-tax money first, followed by IRA funds, leaving Roth money as the last money withdrawn.  There is a vast amount of information on this topic, and anyone approaching or in retirement should spend the time to research and understand the topic.  Again, a Certified Financial Planner is able to offer this service if you’re unwilling to educate yourself.   Regardless of how you choose to manage it, manage it you must.

5. Optimize Social Security

Another topic too detailed to address in this summary, but optimizing your social security benefit is one of the largest decisions you face as a retiree.  In general, the longer you can defer starting your withdrawals, the better (unless you have a health risk and fear an early death).  Social security benefits compound at an 8% annual growth rate, which is the best “no risk” return you can earn.  Study up on this carefully before beginning your benefits, and make every effort to delay your claiming to Age 70 if possible.

6. Fill Your Buckets:  Maintain Equity Exposure, But With A Cash Cushion

Retirees are justifiably nervous of bear markets.  Regardless, it is important to maintain an equity exposure to insure your portfolio continues to grow in retirement.  Your expenses will increase with inflation, and your portfolio must grow to fund this increased spending.

To balance this dilemma, build a “Bucket Strategy”, with your “First Bucket” filled with  ~1-2 years of living expenses in cash.   Your “Second Bucket” should cover several additional years of spending needs and be filled with liquid fixed income investments (CD’s, Bond Ladders).  Your “Third Bucket” is filled with higher return and higher risk investments, with a focus on equities.  In the event of a bear market, you avoid “selling” for several years, allowing equity prices to recover before you need access to the funds.  In a Bull market, sell equities at the higher values and refill your first two buckets.  The timeframe of Bucket One and Bucket Two can be adjusted to match your risk profile.  My wife and I are planning a conservative approach, with at least 2 years in Bucket One and an additonal 3-5 years in Bucket 2.

7. Consider Annuities

Finally, don’t forget about annuities.   While these have gotten some bad press, the reality is that there are some very viable options available to meet some critical retirement needs.  In an annuity, you place a significant portion of money with an insurance company in return for a lifelong income stream through retirement.  I’m several years away from retirement, but have been investigating annuities closely as a guaranteed income option, though with lower returns (and less risk) than are typically available through equities.  In my situation, I will likely wait several years for interest rates to increase before allocating some capital into annuities, as the payout is directly correlated to interest rates.  Another approach is to allocate money into annuities over several years to avoid putting all of your money to work in today’s low interest environment.  Regardless of the approach, I encourage you to evaluate annuities with an expert (I’m using Vanguard) as part of your retirement spending strategy.

Conclusion

By using all of the approaches above, you should be able to minimize your risk of outliving your money.  Retirement should be viewed as some of the best years of our lives, and anything we can do to reduce our worry should help us all in reaching The Retirement Manifesto’s objective of “Helping People Achieve A Great Retirement”!

Slowly Making Money Work for You

Money! We work till we break a sweat to earn more money. Money is a useful tool that helps you to get closer to your goals and ambitions. If you decide to make a few rules and religiously follow them, you will have better control over your money. Here are some tips to make your money work for you.

• Hiring a financial planner: Needless to say, a financial planner would not only scrutinize every aspect of your finances; they will deliver decent plans to make sure a higher amount of savings.
• Pensions: Although you are required to abide by a set of rules, you could always speak to your employer about a workplace pension. Inquire about the matter and pick an offered pension plan that is most suitable for you. For instance, if you need flexibility with the payments, probe into the matter with your employer.
• Banks interests: There are several credit card companies that offer you loans with 0% interest. If you are good at managing your finances or have a reliable financial planner, you could save a wad of cash in a savings account with the help of stoozing.
• Invest: Invest in stocks and bonds. If you don’t want to play the stock market game, look for primary shares of a profitable company because they are much safer. Investing in these firms can give you a generous amount of money at the end of each financial year.
• Penny stocks: Contrary to popular belief, “Penny stocks rarely cost a penny” says Jonas Elmerraji (The Street). Let’s say, you buy 5,000 shares at $0.5 costing $2500 and in two days if the price jumps to just $1.5, making $7,500 overnight! It is important to choose the right penny stocks to avoid any pitfalls or losses since the fast and high returns are so alluring at times. Precautions such as; doing background checks, target stocks with volume and find financial track records, etc., will guide you in making the most of your penny.

Follow the tips mentioned above and soon, the money you worked so hard for could work for you.

So You Want to Be a Millionaire?

A Million Dollars.  A Millionaire!!  Once the dream of the lofty 1%, it’s now a figure most could realistically achieve prior to retirement.  Today’s article will focus on this once significant milestone, and explain the realities of achieving it for yourself.

First, a scenario for your consideration:

You’re 22 years old, have just started working, and received a nice $20k sign-on bonus! Congratulations!   You’re now trying to decide whether you should buy that new shiny $20k car to celebrate your new employment!  Alternatively, you could keep your “college junker” for a few more years, milk some life out of it, and avoid the expense.

What’s the impact?

If you DON’T buy the $20k car, but rather park the $20k in an investment earning an optimistic 10%, YOU’LL BE A MILLIONAIRE by your mid-60’s.  For ONLY $20K TODAY!  One decision, early in life, compounded over many decades, has a profound impact on your long term financial wealth (for more on the power of compounding, which Albert Einstein called “The Most Powerful Force In The Universe”, click HERE).  I’d also suggest you consider sharing this article with your kids and/or grand-kids – the best personal finance advice in the world is to START YOUNG.

To support our illustration, below is a compound rate table published in Huffington Post titled“How To Get Rich Slowly”:

You can see for yourself our new employee’s $20k would, in fact,  turn into $905,186 in 40 years ($10k at 10% becomes $452,592, multiply by 2 since we’re starting with $20k).  Add a few more years to get to your mid-60’s, and you’ll clear the Millionaire mark!

So, you’re no longer 22 years old, you argue?  That’s no excuse.  Even if you start at 45, you could turn an achievable $10k investment into an extra $67k by the time you’re 65.  Do it every year, and it becomes real money. While 10% return seems to be a lofty goal, remember the average return for the S&P 500 from 1928 through 2014 is 10% (Investopedia), so it is demonstrated performance on long term investments.

One trick for thinking about the above table:  use it to create a “How Much Is This Really Costing Me” Factor.  For example, if you’re 45 years old and you want to retire at 65, you could look at the row for 20 years.  Assuming 10% return, you’ll see 67,275.  Divide this by the first 10,000 and you end up with 6.73.  To simplify, we’ll round it to 7.

Now the fun part.  For ANYTHING that you spend money on, you can easily see the true cost to your “future self” at age 65.  For example, that $20 shirt you’re thinking of buying?  If you choose not to buy that shirt, your future self will be $140 richer ($20 X 7).  Take a minute and decide a good “Factor” for your situation, then think about it the next time you’re tempted to buy something.

Another interesting way to use the table is to cut out a “0”.  Instead of thinking in $10,000 investments, look at it as $1,000.  For every $1,000 you don’t spend in a given year, you’ll gain $45,259 in 40 years (or, $6,727 in 20 years).  To achieve $1,000 per year, you’d need to find cuts in spending of only $83/month.  Cut your cable TV, and you’d see that much or more every month, every year.  Do it for several years, multiply by $6,727 each year, and you can see the impact that relatively small decisions can make on your net worth over time.

The reality is, you’ll likely NEED a million dollars when you retire, assuming you want to generate $40k per year of retirement income from your portfolio.  Using the “4% Rule“, a portfolio of $1 Million should be able to generate a cash flow of $40,000 per year in your retirement without running out of money.   Side note:  many planners are saying the 4% rule is too aggressive in today’s low interest rate environment, and are encouraging folks to use a more conservative 3% assumption as they put together their Retirement Income Plan.

The reality is that a million dollars “ain’t what it used to be”.  Using this handy little calculator, you can see what a million dollars in years past is worth today.  Using 1963 as an example (the year of my birth), a million dollars in 1963 is, on an inflation adjusted basis, equal to $7.8 Million today!  You don’t need $7.8 million, but you should target $1 million as an achievable goal.  It sounds like a lot of money, but in reality you need a lot of money to support your lifestyle once the pay-checks stop flowing.

The point is this:  recognize the impact your small purchases make when compounded over time.  To quote the Huffington Post article, that $5 cup of Starbuck’s coffee is costing your “future self” $225.  Focus your first efforts on your repeating expenses, like cable TV, land line phones, magazine subscriptions, etc.  Track your spending for a month or two, you’ll be surprised what you can find.  Go on a hunt, and free up whatever you can to invest.  Remember your reason, and be encouraged by recognizing that whatever you save is worth far more to your future self.

Do it long enough, aggressively enough, intentionally enough, and you will become a millionaire.

Or an alternative and faster yet riskier route to becoming a millionaire is by starting-up a tech company.

5 Things Rich People Do With Their Money

Do you think you can learn something from rich people? How much do you know about them? Have you studied their habits to see what you can learn? Do you think they inherited most of their wealth? (They didn’t.  In fact, only 10% inherited their wealth). Did they start on their paths toward financial responsibility earlier than most?  (They did, with the average wealthy person starting to save by the age of 14).

What are the top 5 things rich people do with their money? Are there common themes which could benefit you if they were applied in your own life? Today, we’ll review some interesting traits of wealthy people.

5 Actions Rich People Take With Their Finances

I read an interesting survey this week from US Trust, which covered 684 high net worth investors, with at least $3 Million in investable assets. There are some very interesting findings in the survey, which is my focus for today’s article. There are, indeed, some verycommon traits among these folks. All of us could benefit from studying their habits and applying them in our own lives.

Here, then, are the top 5 common traits regarding how rich people manage their money. Think about which ones you already do, and attempt to apply a few that you don’t.

1. They Start Early

According to the US Trust study, a common trait among the wealthy is the fact that they had parents who instilled a strong sense of financial responsibility at an early age. The average wealthy person began saving at Age 14, began working for money at Age 15, started charitable giving (time or money) by the Age of 23, and started investing in the stock market by Age 25.

I started working (and saving) when I was 10. In elementary school, I started shoveling driveways in the neighborhood, and got my first “real job” (a paper route) at age 13. I saved diligently, and had several thousand dollars in my savings account by the time I graduated from high school. Clearly, my parents instilled the work/thrift ethic in me, and my wife and I have worked to instill it in our own daughter.

2.  They Delay Gratification

I had a discussion during lunch with a financial planning friend last weekend, where we discussed the single most important attribute required for wealth creation. We both agreed that delaying gratification is likely one of the most important things within our control for creating wealth. (By the way, my friend’s name is Ed Wolpert, and he’s written 3 books on personal finance. Have a look here).

Apparently, the wealthy feel the same way about delaying gratification, with 80% of them saying that investing in long-term goals is more important than funding current wants and needs. As I explained to my daughter when she expressed a desire for a motorcyle, if you want to build wealth you need to save the money first and buy things you WANT in cash.  It helps you delay your gratification, and insures your money works for you (instead of the other way around).

3. They Focus Their Investments On Buy-And-Hold

In spite of significant wealth, 85% of high-net worth investors say they made their biggest investment gains through long-term buy and hold strategies. Rather than being savyy day-traders, they automate their savings month in and month out, and gradually watch their net worth grow. They keep their investments simple, with 89% using a traditional buy and hold approach in mostly stocks and bonds.

In addition, the wealthy maintain cash reserves, with 54% of them holding at least 10% of their portfolios in cash. They also invest in tangible assets, with roughly half of high net worth investors owing real estate or farmland that produces income and appreciates over time. Compare this to the “average” person, who borrows an average of $30k on a 68 month loan to buy a new car, which depreciates immediately. Smart? Not.

4. They Are Charitable

Wealthy folks share a common trait of feeling a deep commitment to give back to society. 74% donate their money, 61% volunteer their time, and 47% serve on boards. They find a way to contribute to others, which is counter to the stereotype so often attributed to the wealthy.

As I wrote in “No One Has Ever Become Poor By Giving”, generosity brings unexpected rewards to the giver. The wealthy have discovered that reality, and most do not hoard their wealth.

5. They Manage Their Own Destiny

Whether the wealthy gained their riches via private business or corporate roles, they all agree that owning a business is a path to greater wealth than working for someone else. I read a lot, and there are dozens of articles like this one that point to the reality that entrepreneurship is the surest way to real wealth. It can be a difficult path, however, as 70% of the wealthy who are business owners agree that it’s more challenging than just “having a job”. Regardless, 80% still prefer to run their own business, demonstrating their motivation to take control of their own destiny. The wealthy work hard, and often make sacrifices. 71% say work responsibilities take priority over personal needs. Think about what you really want in life before you pursue wealth, there are tradeoffs.

Summary

Wealthy people share some common themes in how they manage their money. I don’t know whether it’s cause or effect, but the principles outlined above have been proven time and time again to be fundamental building blocks for wealth creation. Yet again, this survey by US Trust proves these principles are critical, and followed by a majority of people with significant wealth.

How about you?

How many of the items on the list above are apparent in your life? Are there a few that you can begin applying to your personal situation? Work toward implementing all 5 in your personal finances, and you’ll be well on your way to…