Before I left my job, a co-worker and friend of mine had a valuable story to tell about retirement, and how to wisely enter into retirement. He had worked for nearly 30 years with the same company, and agreed to an early retirement offer from that firm. He had saved and invested well in the stock market over the course of many years; he did everything right. However, the recession of the early 21st century slashed his retirement accounts. Does this story sound familiar?
In this edition of Personal Finance Resources, I would like to offer some ideas on how to allocate and use your saving while in retirement. Many of the larger financial institutions offer a wealth of resources to save for retirement, but not how to spend your money wisely while you are in retirement. So without further ado, let’s get started:
- The golden rule of retirement spending:
Spend no more than 5% of your savings per year, and you should expect to maintain your principal balance in your account(s). This concept is very simple as most CDs, money market accounts, bond funds, etc. are very low risk, but still offer a return close to 5%. So if you earn 5% on your principal, and spend 5% per year, than you should end up with roughly the same amount of money, therefore you can effectively live forever (at least from a financial standpoint, 🙂 ).
- Transfer your high risk investments to low risk investment alternatives:
This is part of the issue my friend was faced with when the early 21st century recession hit. He was still invested in moderate to high risk funds, and as the market fell, he got hammered. Now, over a long time line, investing in these types of funds tends to yield much better results; however, if you are needing your money now (like in retirement), then you need to be in lower risk securities such as bond funds, money markets and CDs.
- Don’t get suckered into ridiculous spending:
Timeshares, expensive vacations, and other things all sound great, but can really hammer your hard earned savings. Now don’t get me wrong, you need to have some fun in retirement, but don’t let the salesmen talk you into all the extras that spiral the costs up. Get the basic vacation packages, and don’t buy timeshares. Also, don’t buy new cars every year, or participate in car leases. There is a tremendous expense associated with this type of car buying. Get that new car you want, but keep it for a few years.
- If you get into trouble and need money, consider a reverse mortgage:
I’m not going to get into the nitty-gritty details of the Reverse Mortgage HECM, but this strategy can be a life saver for those in retirement that are hurting. The short of it is that you can get money now at a very low interest cost, with a wide variety of withdrawal/payment options.
These are some simplified methods to wisely dispersing your savings while in retirement. Please leave any comments you have at the bottom of this page.