Making the money last when it's time to shift from saving to spending
You’ve earned and saved money and now you’re headed into retirement. What could go wrong? Along with a new schedule and opportunities come new questions and challenges, particularly around finances. The most pressing ones are often: “Do I have enough savings to last my lifetime?” and “How do I turn my nest egg into a paycheck that I can count on throughout retirement?”
One of the biggest changes in retirement is going from receiving a consistent paycheck to needing to generate your own cash flow to cover expenses. This shift requires a new investment strategy and mindset.
The 3 Phases of Retirement
To start, you’ll want to think of retirement as a series of three unique stages:
The “Go Go” Years In the first years of retirement, you’ll likely be focused on the fun things in life, such as travel or enjoying activities with friends and family. The result can be a spike in lifestyle expenses. During this period, your investment strategy should account for a faster withdrawal rate from your portfolio and more money going out the door.
The “Slow Go” Years Throughout these years, it’s likely you’ll settle into a routine. Your desire to be as active may taper off, and with it, life expenses can tend to go down.
The “No Go” Years More Americans are living into their 90s or beyond. While this is a testament to our medical advancements, increased longevity is often accompanied by physical limitations. At this point in life, you may scale back your activity even more and find that your remaining expenses are focused on daily living and possibly health care-related.
5 Ways to Restructure Your Portfolio for Retirement
Throughout the different phases of retirement, you’ll need to develop strategies around covering your day-to-day expenses as well as the best ways to tap into your assets. Both strategies should meet your goals and reflect your views on risk. Regardless of your circumstances, be sure to address five key areas when mapping out your retirement income plan:
1. Protect against sequence risk If the stock market takes a tumble and you’re not appropriately diversified, you could be forced to pull money out of investments that have declined precipitously. The returns during the first few years of retirement can have an especially significant impact on your long-term wealth picture — this is known as “sequence risk.”
So consider keeping some of your money in liquid investments such as cash or other relatively safe, short-term vehicles to cover expenses for the first two or three years of retirement.
2. Match your assets to your expenses Identify which of your expenses are required to meet your basic needs of living, (such as food, shelter, utilities and health care) and which are discretionary (like travel and hobbies). Then, target sources of guaranteed or stable income to meet your essential expenses. This can include Social Security, a pension if you’ll get one and perhaps an annuity with guaranteed payments.
You can use investments that may vary in value to meet your discretionary expenses.
3. Remember that taxes are an ongoing expense As you create your own paycheck in retirement from your savings; remember that you may still have a tax liability. Unlike your working years, taxes may not be automatically withheld from your sources of cash flow. Even the majority of Social Security recipients are subject to tax on the benefits they receive.
Depending on how effectively you manage your income level, you may qualify for a zero percent long-term capital gains tax rate when liquidating certain investments in a taxable account.
Working with a financial professional before, and throughout, retirement can help you calculate how much you may owe in taxes or which tax breaks you may be eligible to receive.
4. Pay attention to required distribution rules for your retirement accounts If you have money in traditional Individual Retirement Accounts (IRAs) or workplace retirement plans, remember to comply with the government’s required minimum distribution (RMD) rules.
After age 70 1/2, you must take withdrawals from these accounts annually — even if you don’t need the money — based on a schedule provided by the Internal Revenue Service. Failure to comply can result in a significant tax penalty. (Money held in Roth IRAs is not subject to RMD rules).
5. Keep in mind that growth is still a concern When you are younger and accumulating wealth, your primary investment focus is growing your assets. However, in retirement you need to think about the potential impact that inflation could have on your future income needs.
To keep pace with rising living costs, you will still need to grow your assets. That may mean keeping a portion of your portfolio invested in equities that historically have outpaced inflation, but could also be subject to more market volatility.
Start planning early to protect what you’ve accumulated and position your assets for their new purpose — to generate income to last throughout your retirement.
Lots of people dream of becoming a millionaire, but few actually know what it takes to get there. Most millionaires weren’t handed their wealth, and few stumbled upon it by luck. A mere 20 percent of them inherited their money, according to Thomas J. Stanley's book The Millionaire Next Door. The conclusion? The majority of millionaires are self-made.
So, if you want to be a member of that elite group, exactly how do you make a million bucks? The truth is, there’s no secret handbook for millionaires. Most of them follow typical investing best practices. But you do need to be smart with your finances, so do your research and invest strategically.
Stanley, author of the "millionaire" book, also believes that attitude is a contributing factor. “One of the reasons that millionaires are economically successful is that they think differently,” he writes.
Ready to start thinking differently and invest smartly, to make your own million? Here are four tips to help you get there:
1. Be conservative.
When you picture today’s millionaires, do you imagine them recklessly gambling with their money and buying and selling stocks at the drop of a hat? Actually, the opposite is true. Most millionaires are very conservative with their money. They are focused more on avoiding risk than on the potential gain they might make from an investment.
Millionaires know that being cautious with their money will ensure they retain and slowly grow their wealth. Too big of a risk, and everything could be lost all at once. But that doesn’t mean millionaires don’t take any risks. “If you embrace risk at the right time, you can actually reduce it over the long term,” Spencer Jakab, author of Heads I Win, Tails I Win, in an article for TIME.
Don’t be blindsided by the possibility of a large reward when you choose an investment. Avoid investments that are too risky, and be strategic with the investments you do make.
2. Diversify your investments.
One of the biggest investment mistakes you can make is to bet all your money on one horse. Millionaires know that to avoid risk, they need to have a diverse portfolio. That way, they aren’t relying on one company. If one of the companies they’ve invested in takes a hit, they won’t lose everything.
According to a study by Spectrem Group, millionaires invest 44 percent of their assets in stocks. This is typically how most millionaires make their money. They’re strategic in which stocks they buy and how they build their portfolio. They tend to favor low-risk stocks and invest in both foreign and domestic companies.
The younger an investor you are, the riskier investments you can make. As you get older, you’ll want to lower the amount of risk associated with each investment you make, to ensure your finances are stable for the long term.
Millionaires also invest much of their wealth in real estate. With the right property, you can stand to make a lot of cash. Whether you decide to flip houses or look for rental properties, real estate is a potentially lucrative investment opportunity.
3. Minimize fees and costs.
In an interview with Bloomberg, Warren Buffett, CEO of Berkshire Hathaway, said, “Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Successful investors don’t have to be the smartest financial minds. But they do know what to do to hold on to their wealth. The U.S. Trust survey found that 90 percent of participating millionaires believed that the best investment strategy is the "buy-and-hold" approach.
By holding on to their investments, millionaires maximize their returns. They keep their transaction costs and other fees to a minimum to ensure the highest possible return.
4. Seek out advice.
No man is an island, and neither, it seems, are millionaires. Not all millionaires are investment experts, and many of them choose to seek out help with their portfolios. Spectrum Group finds that two-thirds of millionaires consult with an advisor.
Millionaires know they don’t need to have all the answers or do intense research on each and every investment. They leave that work to their advisor. But they don%E
How many times have you been told that saving money is a good thing? Financial specialists recommend that you save a bit of money every month, but that's easier said than done. After all, it’s not uncommon for people to live paycheck to paycheck.
However, if you want to start a company, you’ll need to break away from this cycle and start budgeting and saving. At times, this will be a trying task, but it must be done if you want to invest in your future as an entrepreneur.
If you want to start managing your money more effectively and set yourself up to become an entrepreneur, follow the six tips below. With these techniques in your arsenal, you’ll start so see immediate changes, and you’ll set good behaviors in motion that’ll serve you throughout your career as an entrepreneur.
1. Prioritize organization.
When you are organized, you can track every facet of your finances. Record all of your financial information in one place so you can refer to it and keep track of your progress.
When you chronicle all of your financial information, you may want to try and organize it by category. For example, when you are recording your current costs, you can categorize them as “urgent” and “future.” Not only will this system help you stay on top of your personal finances, but it’ll prepare you for entrepreneurial success because it’s a directly transferable skill.
2. Check your credit.
According to a recent MoneyTips survey, nearly 30 percent of people don’t know their credit score. If you are among this group, it’s time to request a free credit report. Once you know your number, assuming money’s tight, feel free to use a few do-it-yourself credit repair techniques to quickly improve your score.
Understanding your credit score and improving it to the best of your ability is paramount when it comes to money management. A little-known fact among aspiring entrepreneurs is that the funding a new business receives is often dependent on the founder’s credit score.
3. Save where you can.
People often cringe when they think about cutting back. Fortunately, there are several painless ways to save. Look at your daily habits and see if you have any spending trends. For example, if you spend $5 every day on lattes, you might consider cutting back and only having the expensive latte every other day. Slowly, you’ll get used to this new habit, and your bank account will reap the rewards.
4. Search for additional information.
Have you heard of The Penny Hoarder or Dough Roller? These are just two personal finance blogs that can help you better manage your money, but there’s a whole lot more out there.
Subscribe to websites and follow podcasts that offer advice on money management. Also, keep your eyes peeled for informative outlets that speak directly about entrepreneurial finances and follow them, too.
5. Set long- and short-term goals.
Have you ever noticed that people want to reach their goals in as little time as possible? If you pick up almost any given health magazine, it’ll claim that it can help you achieve extreme results in little to no time. Unfortunately, crash diets are often ineffective, and “get rich quick” money management techniques often lack substance.
It’s hard to accept that your goals will take time to accomplish, which is why you create short- and long-term goals. In either case, aim to make goals that are specific, measurable, attainable, relevant and time-based. Ideally, accomplishing your short-term goals will give you the positive feedback that you need to continue striving for your long-term goals.
6. Find a mentor.
If you manage your personal finances and entrepreneurial finances, one thing is certain -- at times, it will feel like you can’t keep up with everything. Financial planning can be difficult, and it’s not uncommon for it to feel overwhelming.
As an individual, you can seek out mentors that can help you with personal finances. As an entrepreneur, you can continue to work with these people or seek out more established financial consultants that provide you with guidance you need to run your business.
Managing your finances is a trying and rewarding experience. It will feel messy at times, but the more you practice, the more you’ll improve your personal finances and set yourself up for entrepreneurial money management success.
Herrand Associates is committed to providing quality and dependable investment management to investors, founded on a Philosophy of Investment and Investment Approach aimed at producing an unparalleled experience for clients.
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