Maybe you’re in the homestretch before retirement or perhaps you’ve already stopped working. If you’ve been diligent in setting aside funds to sustain you through your golden years, congratulations are in order, but you can’t rest on your laurels. As life expectancies continue to increase, it’s more important than ever to address concerns that you might outlast your money. As the rebound in the economy and stocks has demonstrated, you need to take steps to plan for the long haul and stick with that plan through downturns. Although there are no guarantees when it comes to investing, consider these five suggestions for planning for the long term:
1. Be able to ride out stock market downturns. Even if investing in equities helped get you where you are today, you may decide that the inherent volatility of the stock market means you should get out of it altogether during retirement. That might not be the best approach.
Instead, try to stay on a path for sustained growth that factors in your personal tolerance for risk. For instance, a conservative investor embarking on retirement might allocate 30% of a portfolio to equities and 70% to fixed-income investments. A more aggressive investor likely would choose a higher percentage—perhaps 40% or 50%—to keep in stocks. But the important thing is to find a balance between risk and reward that helps you meet your goals and that won’t send you fleeing from stocks when they decline sharply.
2. Try to live off the income your investments generate. The longer you can go without tapping the principal of your savings, the better. But that doesn’t mean that interest and dividends alone always can carry the day. Assume you have a $1-million portfolio that produces 3% in annual income ($30,000), plus you and your spouse receive Social Security benefits of $2,000 a month each. That gives the two of you a total of $78,000 annually before taxes, and that may not be enough to support the lifestyle you have in mind.
Depending on your situation, you could arrange to do some consulting work in retirement, wait until age 70 to begin drawing Social Security—a delay that will earn you a higher monthly benefit—or seek higher investment returns. In any event, look for ways to avoid drawing down your savings too quickly.
3. Weigh the 4% solution. That’s a rule of thumb for the percentage of a nest egg you might withdraw annually to take income to fund a 30-year retirement. The idea is to take 4% of your total portfolio during the first year of your retirement and then to adjust that amount in subsequent years to account for inflation.
But like any rule of thumb, this doesn’t factor in unusual circumstances, like the economic conditions you may face. You might decide a lower or higher percentage would be appropriate depending on your situation.
4. Let the IRS determine your income. Once you reach age 70½, you’ll have to begin taking “required minimum distributions” from 401(k)s and other employer-sponsored plans (if you’re no longer working) and IRAs. The size of each year’s RMD depends on your account balances and your life expectancy. Another way to determine how much income to draw from your portfolio during retirement is to use the IRS calculation for your RMDs.
Suppose that you are age 70½ and have $500,000 in an IRA. The IRS says your first distribution would be about $18,800. Will that be sufficient to supplement your other sources of income? In some cases, such an approach might work well, but it doesn’t take all of your personal circumstances into account.
5. Make a “bucket list.” Another possible way to hedge your bets against market downturns and make your savings last is to divide your money into various “buckets.” One bucket might be earmarked to supplement Social Security and other reliable income in covering your basic expenses, with the funds kept in conservative, liquid accounts. You could have a second bucket of money for discretionary expenses, such as travel, that you put into short- and intermediate-term bonds. The remainder could go into a third bucket, invested in a mix of stock and bond funds. As you rebalance the portfolio for the third bucket, you could use proceeds from investment sales to replenish the first two buckets.
All of these ideas are for illustrative purposes only. What you do will depend on your personal situation and goals. The important thing is to consider all of your options and come up with a plan that is realistic and based on the long haul.
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