As we get ready for retirement, there are some things that may need to be addressed. The main question most of us will have as we enter our retirement years is will I have enough money to last my entire retirement? Many people are comfortable when they are 65 and just starting their retirement years. Many are even comfortable when they reach 75. However, when they reach 85, many are not as sure of their retirement savings. The key is to plan and think about these scenarios prior to retirement in the first place.
In a recent study by TIAA-CREF, only about 36 percent of retirees had considered how their savings would relate to a steady stream of income. As an advisor, this is not an acceptable figure as everyone needs to understand what their retirement savings will translate into. While the only way to guarantee a steady income stream if you are one of the many who will not be relying on a pension is to buy an annuity. But before you go that route make sure you understand it in its entirety as these are some extremely complex financial instruments.
The key to retiree’s not running out of money is to remain invested during your retirement years. While in the past this has not been the standard practice, it is becoming more apparent that it is important for people to remain invested. The main reason is we are living longer and spending more time in our retirement years. Yes, it is possible to spend 35 or more years in retirement when my grandparents were only expecting about 20 or so. With the added years, we need to remain invested to help ensure you do not run out of money prior to your death.
The old rule of subtracting your age from 100 and using that amount as what percentage should be invested in equities is outdated. A more practical way would be to subtract your age from 120 and keep that percentage invested in equities. As equities will help your savings keep ahead of inflation that is the single largest negative that your retirement savings will face.
Another was to make sure you have enough in savings is to watch your retirement spending. If possible, it is wise to make a retirement spending budget prior to retiring to get a good feel for what you will need in income from your savings. Just as with any budget you will have mandatory spending and discretionary spending. Know the difference and cut any discretionary spending that you can in order to preserve your savings for as long as possible.
When you need to add income generating assets to your retirement savings. Some will always look to bonds in this instance, but there are many quality blue chip stocks that pay comparable dividends and also give you the added power of appreciation of the stock’s underlying price. But yes bonds are considerably safer for retirement but do consider dividend blue chip stocks as well. While I think this approach has merits if you want to invest in bonds, try to stay with investment grade bonds. US issued bonds are considered risk free as far as default risk is concerned, but all bonds carry interest rate risks. As a rule, when interest rates increase the value of the bond will decrease. And the reverse is also true. Also, the long the bond has until maturity the more risk you are taking on both credit and interest rate risk. Try to find bonds that have high credit quality and have shorter periods of time until their maturity.
If you need additional information or have any additional questions, feel free to contact me.
