Retirement planning tends to be a case of failing to see the forest for the trees.
You’ll spend years and years budgeting, investing and managing your retirement fund, but then you finally retire and don’t know how to budget, invest or manage your retirement fund.
Even when you’ve dispelled every pre- and post-retirement myth and have a clear vision of how you want your retirement to look, simply winging it and hoping you have enough money to live on in your senior years doesn’t do you -- or the money you spent an entire career saving -- any real justice.
So if you’ve started aggressively saving for retirement, whether it’s 40 years away or four months away, or if you’re a newly minted member of the No Longer Working class, here’s how to make the most out of those retirement assets.
Build your post-retirement budget (before your pre-retirement budget)
Opinions abound on how much you actually need to live on during your retirement years. Some say $1 million, some say double that. Others maintain that you’ll need 70 to 80 percent of your pre-retirement income to retire comfortably. But you may need 90 percent, or 60 percent, or 25 percent; the exact amount ultimately depends on your needs and the lifestyle you want to lead. Some people may need enough money to fund their world travels in retirement; others may simply want to scale down and live a spartan, frugal life.
How exactly you determine your retirement "number" depends entirely on how you go about it. In some cases, consulting a financial professional or advisor is your best option, especially if your working years were spent rigorously investing, and now you need the guidance to know which funds to keep active in the market, and which to make liquid.
Of course, crunching some numbers in true do-it-yourself fashion is another way to take charge of your retirement finances. Using one of these handy retirement calculators may be the way to determine how much money you’ll need to survive and thrive, since they can project how much income you’d need to live on in retirement. Enter some details about your current income, how much you’ve saved for retirement, how much you’re looking to save, and your long-term goals make them useful tools for predicting your financial future.
Take an inventory of all your assets
Do you have a 401(k)? An IRA? Is it a Traditional, or Roth, or both? Any diversified investments, like stocks, bonds, or annuities? Interest-bearing deposit accounts, like high-yield savings or CDs? You can’t manage your money until you know where it is. No, that’s not a reference to early retirement-age senility; but it’s perfectly natural to forget about, for example, an employer-sponsored pension plan you once held at a job years ago.
Taking stock of the various accounts and holdings you have helps to see where you stand and how much money you have, just in case there’s any savings venture you’ve overlooked. Start by making a spreadsheet listing your deposit and investment accounts; writing them down is the first step to checking each one for their dollar value. Downloading a retirement account tracking app to your phone is another way to sync up your accounts together and begin building a financial strategy to save.
Measure up your withdrawals
Just because you stop earning an income in retirement doesn’t mean you stop earning an income.
Come again? You won’t be earning money from a job any longer, but you’ll still receive income from other sources:
Consistent payments from Social Security or an employer pension
Other revenue from retirement savings or investments, like a 401(k), IRA or similar
The main difference is that everyone receives Social Security -- one of the main reasons our paychecks are taxed is to collect SSI money to pay back to you later. As for retirement savings, that’s up to you if you decide to participate in employer retirement plans or open your own account. Social Security will arrive like your old paycheck did, weekly or biweekly. And your investments? You’ll be required to make withdrawals from retirement plans once you reach age 70 ½.
Managing those income streams doesn’t mean you need to withdraw everything in one fell swoop. Sticking with the 4 Percent Rule, withdrawing no more than 4 percent of your money in the first year of retirement, cultivates discipline and prevents you from depleting too much of your reserves.
In each subsequent year, gradually increase your withdrawals by multiplying the same 4 percent by 1.03, allowing for a 3-percent inflation adjustment to keep up with the cost of living. However, these numbers aren’t set in stone. Depending on your own cost of living, the economy, or how well or how poorly your investments are performing, you may want to limit your Year One withdrawals to 3 or 3.5 percent and go up from there year to year.
Bucket your money
Your retirement money shouldn’t be a drop in the bucket -- but you can use the bucket method to organize your funds. Three buckets, precisely, to divide up your funds according to ongoing needs:
Bucket #1, Immediate cash/day-to-day expenses**: You’ll need an accessible, readily available source of money to pay for revolving, everyday expenses and monthly bills, like groceries, utilities, your credit card bill, etc. Reserves in bucket one should include mostly after-tax money and shorter-term fixed assets that can be cashed out and used.
Bucket #2, Short-to-mid-term savings and investment goals**: Funds in bucket number two should go towards shorter term savings goals, like financing your upcoming vacations. Ideally, it’ll be a mixture of after-tax funds.
Bucket #3, Post-tax investments and emergencies**: Or, do-not-touch-unless-absolutely-necessary money. You should dedicate funds to your third bucket that you don’t intend on withdrawing or spending for a decade or more. Use it in the event of an unplanned, unexpected expense, like a major repair or surprise bill that may arise. These funds can be in addition to any existing emergency funds you may already have in place; investment company Fidelity recommends that if you invest this money, keep it invested liquid, like in a money market account, or in a CD, liquid after a short period of time.
Reduce your expenses
There’s an assumption that retirement is a time to be less careful with your money. In reality, it should be the period of your life when you’re the most careful, since your income will rely entirely on your ability to save and manage your money when you’re no longer in the workforce. Reducing your expenses and looking for ways to save can free up cash flow where it’s needed. Try some of these tips:
Always take senior discounts when available
Join retirement-focused groups, like AARP
Reduce banking fees by setting up direct deposit or no-fee bank accounts
Cash in on your credit card rewards
Tap into your home’s equity
For debts you haven’t yet paid off yet, like a mortgage or auto loan, seek to lower your interest rates by refinancing
Downsize to smaller accommodations or relocate somewhere with a more affordable cost of living
Low-income earners can save on medical costs by taking advantage of Medicare and Medicaid, if possible
Consider taking on a low-stress part-time job to earn some supplemental income
Calculating how much money you’ll need in retirement -- and then managing that money when you’re in retirement mode -- can’t be boiled down to an exact equation or science.
It all comes down to how much you earned over your career; how much money you saved; how well your investments performed; and your ability to maximize your money before and after retirement. Even your age and lifespan play a big role.
Most of all, it really comes down to you and becoming proactive with your money in retirement. The earlier you start planning, the readier you’ll be when you retire, and the more financial leverage you’ll have to work with to enjoy your retirement enriched with the personal and financial wealth you deserve for years to come.