3 Steps to Prepare for Retirement in a Slow Economy
People considering retirement in the near future, as well as early retirees, will likely have to navigate rough waters during these times. A stock market crasha slowdown in the economy and a Federal Reserve that has signaled more interest rate increases Fighting inflation requires retirees to make smart decisions so they don’t jeopardize a successful retirement.
That’s where a well-thought-out financial plan can help make a comfortable retirement possible, even during a tough economy. When I talk to recent retirees or people considering retiring soon, here are three actions I generally recommend to help them navigate this important life transition.
1. Examine your spending history.
Many people do not maintain a family budget in the earning years of their career. Nor do they want to live in strict retirement budget, so I use a different approach: We add up all annual spending for the last three years to look at macro trends in spending patterns. Anyone can do this by collecting all bank and credit card statements to find spending averages.
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The purpose of this exercise is to see if this spending trend is sustainable for the next 30 years of retirement. An individual or couple must be able to live off their savings portfolio and guaranteed sources of income, such as Social Security benefits.
Also, most new retirees soon realize that they need to fill their days with at least one important activity, and this often costs money. During the first two years of retirement, I have seen my clients spend large sums of money on home improvements, as well as things like international and domestic travel in an RV. Certain hobbies, like restoring a classic car, can easily cost tens of thousands of dollars and put a strain on your financial plan.
If there is a need to reduce spending, there may be some easy solutions. These can include lowering automated monthly subscription payments, increasing home and auto deductibles in exchange for lower insurance premiums, traveling in the off-season, and undertaking some home improvement projects instead of hiring professionals.
Some may be bigger changes: people may decide to downsize their home or consider selling additional cars to save even more money.
2. Create a plan to survive a falling stock market.
Worry during uncertain times is normal. But those with a comprehensive financial plan should be able to get by without making costly mistakes.
Selling investments at a loss is often based on fear. Most financial advisers know someone who sold their stocks when the market crashed in March 2020. But markets quickly turned around, setting all-time highs for nearly two years afterward. A person with millions in investments who sold his stock and lost 20% of its value often blocked his losses, missing out on the opportunity to reap the potential benefits of market gains on the road to recovery.
As a potential recession approaches, one way I help prepare clients to plan for their retirement income is create a link ladder.
A bond ladder allows someone to buy a variety of individual bonds with different maturity dates—the date an investor receives the interest payment on his or her bond. For example, a person could invest $100,000 and buy 10 different bonds, each with a face value of $10,000. Because each bond will have a different maturity date, an investor will have a guaranteed regular stream of income if held until Due date. High-quality bonds that will be held to maturity can provide a household with a steady stream of income for years to come.
3. Understand that you will need enough money to last you 20-30 years.
Many people in their 60s who plan to retire with between $1.5 million and $5 million in investment assets can feel comfortable. But they often don’t know if their money will last them at least two decades, possibly longer. By creating a plan based on different statistical models, a retiree can define their sustainable withdrawal rate, including longevity risks.
The US population of people age 90 and older nearly tripled between 1980 and 2010 to 1.9 million and is expected to increase significantly over the next four decades. This means that new retirees will need enough money to live comfortably for a long time and may not be able to leave money to their heirs.
Each plan is different to suit individual or couple needs. But all of them should help determine a sustainable rate of withdrawal from a person’s or couple’s portfolio that will last a lifetime and meet your financial goals. For example, some couples may want to spend every penny, while others will want to leave something for their heirs. Each plan is designed to withstand the stress of events that create uncertainty, such as a recession or a major geopolitical event.
I regularly work with clients during difficult times who are planning to retire or have just retired, helping them segment assets into buckets of money so they have the ability to weather market volatility and are also prepared to take advantage of growth opportunities when the market recover Being intentional about a retirement income strategy is key to reducing emotional fears, because the spending-cutting phase of life is so different than the hoarding mentality.
Difficult times may be ahead. But with a conscious spending plan and a strategic retirement income plan that’s been tested using statistical models, it may still be possible to retire with confidence in a volatile market.