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Whatever your retirement dream is, it can be turned into reality. It just depends on how you plan and manage your resources. On any trip it helps to consider where you’re going, how you plan to travel, and what you want to do once you get there.
If this sounds like a holiday, well, it should be. Most people spend more time planning a vacation than something like retirement. And if you consider retirement as the next step in your life and approach it properly, you won’t get bored so easily or run out of money to continue the journey or get lost and make poor money decisions along the way .
what matters is how you handle it
How much you really need depends on the lifestyle you expect to lead. And it is not necessary that your expenses will come down in retirement. Assuming you have an idea of what your annual expenses might be in today’s dollars, you now have goals to shoot for in your planning and investing.
Add up income from the sources you expect in retirement. This can include Social Security benefits (the system is solvent for at least 25 years), any pensions (if you’re lucky enough to have such an employer-sponsored plan) and any income from jobs or that new career.
Endowment Spending: Pretend You’re Like Harvard or Yale
Consider adopting the same approach that keeps large organizations and endowments running. They plan to be around for a long time, so they target a spending rate that allows the organization to sustain itself.
1.find your gap: Take your budget, subtract the expected income sources and use the result as your target for your withdrawal. Keep this number to no more than 4%-5% of your total investment portfolio.
2.use a mixed approach: Consider increasing or decreasing your withdrawals each year by 90% of the previous year’s rate and 10% based on the performance of the investment portfolio. If it goes up, you get a raise. If the investment value goes down, you have to brace yourself. This works well in times of inflation to help you maintain your lifestyle.
3. stay invested: May feel like taking bail from the stock market. But it is still prudent to allocate a portion to equity despite the roller coaster we have had. Keeping in mind that people are living longer, you may want to use this rule of thumb for your allocation across stocks: 128 minus your age. Regardless, you should really keep at least 30% of your investment portfolio (not including security net money) in equities.
If you think the stock market is scary because it’s prone to periods of wild swings, consider the risk that inflation will have on your purchasing power. Bonds and CDs alone have historically not kept pace with inflation. Only investing in equities has demonstrated this ability.
But invest wisely. While asset allocation makes sense, you don’t have to be married to “buy-and-hold” and accept being bounced like a yo-yo. Your core allocation can be supplemented with more strategic or defensive investments. And you can change the mix of equities to reduce the roller coaster effect. Consider including equity in large dividend-paying companies. And add asset classes that are not tied to the ups and downs of major market indices. These options will change over time but build defensively around your core, adding things like commodities (oil, agricultural products), commodity producers (mining companies), distribution companies (pipelines), convertible bonds and managed futures over time. The ring should be reevaluated. ,
4.invest for income: don’t trust directly bond Which has its own set of risk as compared to stocks. (Think credit default risk or the effect of higher interest rates on your bond’s fixed income coupons).
Combine your bond holdings to take advantage of the characteristics of different types of bonds. To protect against the negative impact of higher interest rates, consider corporate floating rate notes or mutual funds that include them. By adding high-yield bonds to the mix, you’ll finally have some protection against higher interest rates. While junk bonds are called that for a reason, they may not actually be as risky as other bonds. Add Treasury Inflation Protected Securities (TIPS) which are backed by the full faith and credit of the US government. Add in bonds from emerging countries. While there is a currency risk, many of these countries do not have the same structural deficits or economic issues that the US and developed countries have. Many learned a lesson from the debt crisis of the late 1990s and did not invest in foreign bonds created by the financial engineers on Wall Street.
Include dividend paying stocks or stock mutual funds in your mix. Large foreign companies are great sources of dividends. Unlike the US, Europe has more companies that pay dividends. And they pay monthly instead of quarterly here in the US. Balance this with hybrid investments such as convertible bonds that pay interest and provide upside appreciation.
5. create a safety netTo replenish reserves to sleep well at night: Use the bucket approach to dip into investment buckets that should contain approximately 2 years’ worth of cash investments: savings, laddered CDs and fixed annuities.
Yes, I said annuity. This safety net is supported by three legs, so you’re not putting all of your egg into a fixed-term annuity much less an annuity. To many it may be a dirty word. But the best way to get a good night’s sleep is to know that your “must have” expenses are covered. You can get fixed annuities at a relatively low cost without all the bells, whistles and complexity of other types of annuities. (While tempted, I tend to forgo “bonus” annuities because of the long schedule of surrender charges). You can stagger their terms (1-year, 2-year, 3-year and 5-year) just like a CD. To reduce the risk of any one insurer, you should also consider spreading them over more than one well-rated insurance carrier.
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