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.