By Anna Wroblewska.
Financial markets are, unfortunately, totally unpredictable. While your retirement savings could be growing rapidly in one decade, they could easily fall or stagnate in the next. Added to all the other worries you might be facing as a retiree, do you really want the additional stress of wondering how much you can withdraw from your account next year -- or if you'll run out of money in the coming decades?
Creating retirement peace of mind starts by taking these four steps, which will insulate you from some of the swings of the market and build some predictability into your life.
Build a stable income base
You essentially have a choice as a retiree: you can rely on a fluctuating asset base, like retirement savings, as your main source of income, or you can build some stability with a consistent income stream.
Having a stable income that you can rely on will take a lot of the stress out of the equation. You won't have to worry about what the market is doing or whether you're withdrawing too much this year.
How do you do it? You might already have a pension, property rental income, Social Security, or another steady source of funds. Or you can divert some of your retirement savings to a fixed annuity, which provides a guaranteed income stream for life. Wherever it comes from, the key is to find a way to rely primarily on an income source (or sources) that doesn't fluctuate along with the market and provides you with enough cash to cover your basic costs.
Make sure you have liquid assets
Having liquid assets that you can dip into if something comes up will also insulate you from the market. Think about how stressful it would be if you suddenly needed a lot of capital -- right when the market drops. While you won't make any breathtaking returns on your liquid fund, it will add peace of mind to know that it's there and easily accessible if you need it.
How much you actually want to keep in cash (or equivalents) can depend on your personal risk tolerance and situation, but if your typical "emergency fund" guidance is anywhere from a few months to a year for someone of working age, consider extending that to a year or two. You might even want to go further out if you really want to ensure that you'll be okay no matter what happens in your IRA or 401(k).
How you build this base is up to you. Have you considered downsizing your home? Selling other unnecessary assets? Liquidating some investments? Put the cash together and, most importantly, leave it there -- eventually it will probably come in handy.
Be flexible about drawing down your retirement accounts
Once you have a stable income base and a savings account, the vagaries of the market will become a lot less stressful. This isn't just good for your peace of mind: there is simply no easy answer to the question of how much you can "comfortably" withdraw from your retirement accounts -- so the more flexible you can be about withdrawals, the better.
For example, popular rules of thumb, like the "4% withdrawal rate" idea, have simply not lived up the claims of being universally applicable, or even reasonably conservative. In fact, recent research has found that with the current market environment and a portfolio allocated 40% to equities and 60% to bonds, you'd have an over 50% chance of running out of money in 30 years if you rely on this rule.
If you have a stable income source, you can solve this problem by building flexibility into your withdrawal rate. Instead of 4%, consider withdrawing just 2%, or better yet, think about instituting a rule that says you can take 75% of what your portfolio returned in the previous year. In good years, you can use the extra money to pad your savings and go on a great trip, and in bad years you can still be free of worries about sudden car repairs or other expenses.
While it won't be as generous or as simple as a simple "4% per year," basing your withdrawals on your earnings will help you to ensure that your savings can go the distance and last for the long term.
Be conservative about healthcare expenses
Need another reason to be flexible about retirement account withdrawals? It's no one's favorite subject, but keep in mind that the older you get, the more money you might need for medical care. Unfortunately, you simply can't afford to ignore the fact that healthcare costs vary widely, they're unpredictable, and they're rising no matter what you're spending now.
To give you an idea of how much these expenses can vary, consider that in 2010 someone in the 25th percentile of spending laid out an average of just under $2,000 per year on healthcare. A person in the 90th percentile spent nearly $6,000. Add inflationary pressures, and in 2040 one researcher estimated that the 25th percentile person would spend $5,000 per year -- and the 90th percentile person and just under $14,000.
How do you prepare yourself for the unpredictable? It goes back, once again, to the first three tips: build an income stream you can live off of, and stay conservative about stashing away the rest. Don't pull from your retirement account if you can help it, and try to minimize distributions where you can.
If you find that you're 90 and in peak form, you'll still have the money to go snorkeling in Thailand. But if, on the other hand, you're 90 and in need of extra nursing help, you'll also be happy to have the money and the peace of mind of knowing you can afford it.
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