People’s ideas about retirement feasibility are being challenged. Many folks are putting off quitting work in hope of being in a better position later to enjoy the golden years. I’d like to discuss four concepts I believe are imperative to any successful retirement planning you do.
Get a war chest. You hear a lot about emergency funds. Expert opinions vary on how much should be in an emergency fund and where it should be kept. In times of such great complexity, I like to keep things simple. To provide ample cushion in case of normal unexpected expenses and to help resist the temptation of making an emotional decision to tinker with your long-term investments, get a war chest. This is at least one year’s worth of your expenses kept in highly accessible place that has little or no chance of declining. Use regular savings, tax refunds and financial windfalls to build it.
Remember, it’s used only in case of emergency. A true emergency threatens your family’s survival. The reality is those with a back-up fund are going to be in better shape over the long run than those without one.
Set a core lifestyle in advance. There is a way to increase your chances of “staying” retired.
This requires “practicing” retirement. You may have heard it suggested that you will need 70 to 80 percent of your income in retirement. In my experience with clients, I’ve found expenses rarely go down after retirement. We settle into a standard of living and want desperately to keep it. In some cases, life may get more expensive. Frugality that is practiced in advance and sustained is imperative to a retirement lifestyle that has high certainty of lasting as long as you do. So start living what you believe is a sustainable lifestyle 3-5 years in advance of retirement and the transition will be a smoother one.
Create a retirement distribution plan. A 2008 study called “Spending the Nest Egg” done by the Vanguard Center for Retirement Research found that less than one in 10 people have a formal spending plan in place. We’re not just talking about a budget here. More people have plans on how to accumulate money for retirement, but a plan to distribute the money is commonly absent.
There are varied opinions on which distribution strategies are best for retirees. There are pros and cons to each, and they all can work. These methods will be covered in depth in another section of the book. Any distribution strategy should consider:
1. The real possibility the money needs to last 30 to 40 years
2. The cost of living will continue to go up and you need to keep up
3. The assets will experience some kind of risk (not just market risk)
4. Taxes will never go away
5. Careful thought should be given to the withdrawal percentage
It’s important to set a portfolio withdrawal rate that doesn’t put the longevity of the money at great risk. One other point worth mentioning: at all costs, you want to avoid taking income from something that is going down.
Debt is a retiree’s enemy. Debt has its necessary uses. Some things in life just can’t easily be bought for cash. But, the expanding uses for debt and easy access to it greatly contributed to the country’s economic fall in 2008.
Here’s a simple question: If you have no debt going into retirement, will your living expenses be more or less than if you had debt? It’s rhetorical, of course, but folks will rationalize themselves silly to buy something they don’t need with money they must borrow to impress people they don’t even like. What kinds of debt are acceptable?
Many people have the misconception that if something can be bought on credit, it’s OK to buy it on credit. In my opinion, debt can be used only for the purchase of something that you believe has the ability to show a return.
Yes, you may choose to take a car loan every seven to 10 years, but keeping your core expenses down is a major component of staying retired.