Retirement represents a drastic shift in how we live. Instead of regular paychecks providing for expenses, a person (and family) must instead rely on accumulated assets, Social Security, pensions, and related sources of income to sustain one’s lifetime for an unknown duration. Is there any wonder why retirement is one of the greatest stressors in a person’s life?
When you are retired, and work becomes “optional,” your investment philosophy changes from savings and growth, to creating cash flow while taking enough investment risk so your money lasts your lifetime.
A convenient way to think about investments is to allocate 4 to 6 percent of your assets to cash flow – depending on life expectancy, asset allocation, how much you want to leave for others, and whether you increase your annual sum based on inflation.
Generally, for every $100,000 of investments, you will have $4,000 to $6,000 in annual spending. Some assets grow faster, others slower – which is the purpose behind a diversified portfolio. A pension or Social Security benefit which pays you $36,000 a year is the equivalent of investment assets totaling $600,000 to $900,000. A part-time job that pays you $12,000 a year can replace savings of $200,000 to $300,000. As you can see, there are multiple factors in a review of your income sources.
A home is an asset you use, and while it often has or will appreciate in value, its role in day-to-day living and cash flow is limited. Sure, you can sell it and move into some place cheaper, but those scenarios are more wishful than actual. You can also borrow against it – but both these situations are not usually efficient and are better saved for emergencies or end-of-life planning. As an example, the costs of paying for a long-term care facility are often covered by selling a no longer needed home to pay for several years of care.
Preparation is key. Each year evaluate how much you are saving personally and in retirement plans. The more you spend from your income, the more you will need to replace when you stop working. If you choose not to work another year, then you may need to save more. A common rule of thumb is that you will need to have 80% of your pre-retirement income per year in retirement. Those who spend the most need to save the most.
If you worry about spending, you either need to work longer, or gain control of your worrying. Worrying is often an excuse for not taking action. If you maintain a spending journal, reviewed monthly, you will learn if your spending is impulsive and toxic, or geared toward long-term happiness and health. Money gives you flexibility and freedom only to the extent you don’t lose sleep about it.
Turning assets into spending is why it’s so important to get started on a regular saving plan when you are young. The two most critical aspects of investment success are time and compound interest. By putting money away today, you will receive multiples of that tomorrow. If you have one lesson to leave with your children and grandchildren, save and invest 10% of whatever is earned from day one. The philosophy of paying yourself first comes from George Clason’s book, “The Richest Man in Babylon”, written nearly a century ago. Most Americans commonly pay everyone else first, and if anything is left, it goes into savings. Yet not all of us have money left to save, particularly as other expenses and obligations take priority. Statistically, Americans are notoriously unprepared for retirement. According to U.S. Census Bureau data, 50% of women and 47% of men between the ages of 55 and 66 have no retirement savings. Wherever you may be on the spectrum, there are always alternative ways to jump start a retirement, which should probably begin with a visit to a local financial planner.
Money is not everything, though when it comes to retirement, the amount you have matters. As we will see in our next installment, money is only one component of a successful retirement.