Even the best savers can run out of money in retirement. In this episode of the One for the Money podcast, I share how making the appropriate adjustments in the few years before and after retirement can help prevent that. In the tips, tricks, and strategy portion, I’ll share information for those who started saving later for early retirement. Listen to learn more!
In this episode...
- Into thin air [01:51]
- Sequence of returns risk [03:30]
- The years before retirement [11:32]
- The bucket strategy [13:09]
- Saving late for early retirement [16:43]
Climbing down carefully
While the most common accident in mountain climbing is falling, the majority of those incidents occur on the way down from the peak. People put so much physical and mental energy into making it to the pinnacle that they don’t take the necessary precautions on the way down. Think of your approaching retirement as submitting your financial Mount Everest. Taking withdrawals from your retirement investments is like climbing down, which requires even more precautions.
The mistakes made after retirement can be costly, and unlike when someone is younger, they don’t have the time or salary to overcome these mistakes. One of retirees’ biggest fears is running out of money. This shortage can happen for many reasons, including negative returns in the first few years before and just after retirement. Another significant risk is inflation. Strategies need to be deployed to address both of these risks.
Before and after retirement
The rate of return in the first few years of retirement significantly impacts how money lasts throughout retirement. Similarly, the rate of returns in the years before retirement makes a huge difference. So what can you do to retire on time without running out of money? We can’t predict the future rates of return, and we can’t know if the stock market will be up or down.
Some might think a good strategy is to be conservative in investments. However, that would also mean slowing growth and not keeping up with inflation. For my clients nearing or in retirement, I employ a bucket strategy. The monies to be withdrawn in the near term are invested more conservatively. Monies to be withdrawn in the next 6-15 years are invested more moderately. Finally, monies that will be withdrawn beyond that timeframe are invested more towards growth or a higher percent allocated to stocks.
Strategies around retirement
In the bucket strategy, the ultimate determining factor for each bucket is the action of the market, the individual client’s spending goals, and their tolerance for risk. The logic behind the strategy is that money spent in the near term shouldn’t be impacted by large swings in the market. Monies spent further in the future have the potential for increased growth to provide future income and offset the effects of inflation.
While the bucket strategy works well for those who completely stop working, another approach would be retiring slowly by reducing work hours before leaving the workforce. This situation would result in less reliance on income generated from an investment portfolio and create a smoother transition from a full-time job to a life without work responsibilities. A flexible or dynamic budget can be helpful to make withdrawals less in down years. Delaying Social Security to increase monthly benefits can also reduce reliance on income generated from a portfolio. These and similar approaches aim to match assets, liabilities, and time horizons as best as possible.
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