The number one fear of retirees is running out of money. How can you create a predictable paycheck in retirement?
Step 1: Create your retirement budget.
Decide how much money you will need each month in retirement by creating a detailed retirement budget. You can download a free Retirement Budget Worksheet from our Retirement Toolkit.
Step 2: Evaluate your potential income sources.
There are 5 primary sources of retirement income: Social Security, pension, personal investments, passive income like rental property and work (usually part-time). Evaluate which of those income sources will be available to you during retirement and estimate how much income you can derive from each.
Step 3: Compare your budget with your income.
Is your anticipated income enough to cover your anticipated expenses? If not, you may need to delay retirement or find ways to trim your retirement budget.
Step 4: Decide on a claiming strategy for each income source.
With Social Security, you can claim early, on time or late. You might be entitled to spousal benefits or it might make sense for you to file and suspend so your spouse can claim benefits based on your record while your benefits continue to grow. Likewise, there are a number of strategies available when pulling money from your investments, such as dividends only, guaranteed income, systematic withdrawal, bucket strategy and a time segmentation strategy to name a few. All that just to say that for each source of income, there is usually a way to maximize that income based on your unique situation. Working with a competent adviser is usually a good idea when you get to this point. There are a lot of moving parts and the difference between a good strategy and a bad one is usually the difference between…well…a good retirement and a bad one.
Step 5: Retire. Review. Recalibrate.
Having a predictable paycheck doesn’t stop once you retire and turn on your various sources of income. Take time each year to review your withdrawal strategy and make changes as necessary. Some questions to ask yourself:
- Is my withdrawal rate sustainable?
- Is my income still sufficient and keeping pace with inflation?
- Is my asset allocation still appropriate?
- Is the amount of risk I’m taking still suitable?
- Has the value of my assets changed significantly?
- Has my life expectancy changed?
Your answers to those questions will help determine if you need to make changes to your investment and/or distribution strategy.
Bonus: How can I make my money last longer?
Earlier I said that one way to help extend the life of your nest egg is to maximize income from sources like Social Security. What are some additional ways to make your money last?
Dynamic Spending: Take a look at your retirement budget. How many of your expenses are non-negotiable vs. discretionary? If most are non-negotiable, then you will likely be forced to draw money from your investments during inopportune times. If, however, you’re able to set up a budget that has a certain level of discretionary spending, then you can adjust your spending based on market conditions. In down years you can put the discretionary spending on hold and extend the life of your nest egg in the process. Housing and transportation are two of the biggest non-discretionary retirement expenses. Downsizing your house and cars or entering retirement with those things paid for can give you a great deal of flexibility with your spending.
Diversification and asset allocation: Having an appropriate asset allocation helps you mange three key risks: 1) It keeps you from being too aggressive and subject to large declines. 2) It keeps you from being too conservative and subject to inflationary erosion. 3) It will hopefully help your portfolio grow consistently over time so it will last as long as you do.
Stay (or get) healthy: Longevity is a risk because the longer you live, the longer your portfolio will need to last. Even so, most of us want to live as long as possible. Staying active and healthy can save on health care co-pays, prescription costs and (biggest of all) long-term care expenses.
I kept things pretty simple in this post. When you start considering things like inflation, longevity and market fluctuations, the complexity of the predictable paycheck multiplies quickly. If you want to take a deeper dive into some of those issues, feel free to check out The Ideal Retirement Design Guide.