Everyone knows they need to save for retirement. But what happens when it’s time to start living on those savings after retirement? How do you make sure it lasts?
The Past: Pensions
In the past, people relied heavily on pensions. If you got a good job with benefits, worked it for thirty or so years, and then retired from that same company you could rely on pension payments to cover most (if not all) your living costs during retirement.
With a good pension, retirees could invest small amounts of money into bonds and certificates of deposits (CDs) to supplement a more luxurious form of lifestyle – not pay their living costs.
Unfortunately, most companies do not offer a pension anymore. In fact, they are almost non-existent. This means that retirees need to rely heavily on other income sources for retirement – and social security payments are not livable wages.
The earlier you start saving for retirement, the better. At a minimum, you should begin to store away cash and invest in a diversified portfolio fifteen years before you plan to retire. If you can begin even earlier – such as in her late twenties or thirties – that’s even better. The longer you plan, the better it will be.
Create A Plan
Retirees should have a plan in place which tells them how much money they will withdraw from their nest egg for each month. Take into consideration the times when you will spend more – like Christmas. Calculate your monthly living expenses, and plan on withdrawing no more than 4 percent of your savings each year. Figure out how much that is per month and calculate your spending accordingly.
Diversify for A Safety Net
Stocks have the potential to go way up in value, but they can also decrease dramatically. Consider a mixture of stocks with risk tolerances which fit your situation. But do not rely on stock dividends alone.
Besides stocks, consider CDs, bonds, and annuities. Don’t forget to have some kind of cash savings, also, and remember other options like reverse mortgages or life insurance pay outs.
Social security payments offer a steady source of monthly income, but you want to wait to start claiming them whenever possible. The minimum retirement age is 62, but people are not eligible for full SSI payments until they reach between 66 and 70. By using this too early you could be sacrificing more than 20 percent of what your payments could be.
If retiring later doesn’t sound ideal to you, try to set yourself up to live on other sources until you reach age 70. Higher social security payments will take the burden off your other financial assets considerably and make it last longer.
Investing in a source of recurring income prior to retirement is a good idea if you have the funds. One popular option is through purchasing rental properties – or by downsizing your own living arrangements and renting out the home you’ve been living in, versus selling.
This option is ideal for homeowners who pay off their mortgages at least five years prior to retirement. When considering properties and rental income, also consider what the mortgage on a new property would be. Consider how much of a profit you would make each month, and whether that is worth it for you.Continue reading