“Chance favors the informed mind.”
uestion: Will I outlive my money?
Answer: This is a common concern of retirees and for those who are preparing for retirement. At the risk of sounding like a wise guy, the answer is “it depends” — on a number of things.
Here’s an example of what I mean; a client with a great sense of humor scheduled his annual physical right before a portfolio review meeting. He told his doctor that he was seeing me later that day and said he needed to know exactly how long he’ll live so we could plan his finances accordingly. The answer was 87; the client was happy and my job instantly became easier. The truth is, unless we know exactly what our life expectancy is, there is no precise way to answer your question. What we can do is work together which increases the likelihood of a successful retirement. Just asking the question and examining your finances undoubtedly increases the odds that you will not outlive your money.
Begin by reviewing current financial needs and anticipate future cash flow, then match this with current resources. Retirement savings may be stretched to last longer by adjusting your spending habits today. If you have major concerns about running out of money, you may need to make drastic changes to your spending patterns in order to make your money last.
Make major changes to spending patterns
• Consolidate any outstanding loans to reduce your interest rate or monthly payment.
• Shop around for less expensive insurance. You’d be amazed at how much you can save by switching to life, home and casualty insurance policies that have lower premiums but still provide the coverage you need. Life and health insurance are the two areas where you can likely save the most, since premiums can go up dramatically with age and declining health. Contemplate higher deductibles and evaluate the potential savings verses the risk exposure. Consult your insurance professional.
• Consider reducing your housing expenses.
• Evaluate the difference between “needs” and “wants.”
Make minor changes to spending patterns
• You’d be surprised how quickly savings add up when you implement a written budget and honestly analyze cash flow. If you have only minor concerns about making your retirement savings last, small changes to spending may be enough.
• Where possible, cut down on utility costs and other household expenses.
• Consider buying a well-maintained used car instead of a new car. (A client recently opted for new tires rather than a new car – this is a perfect example of changing a spending pattern, although, he did splurge on the white walls!)
• Consolidate credit card balances, switch to a lower interest credit card, and cancel old accounts to avoid ongoing fees.
• Reevaluate dining out and reserve this activity for special occasions.
• Plan your expenditures and avoid impulse buying (distinguish wants versus needs).
Carefully manage IRA distributions
If you’re trying to stretch your savings, you may want to withdraw money from your IRA as slowly as possible. This conserves the principal balance and gives your IRA funds the opportunity to continue to grow tax deferred during retirement years. However, keep in mind that you must start taking required minimum distributions (RMDs) from traditional IRAs (not Roth IRAs) after age 70 and a half.
Use caution when spending down your investment principal
Don’t assume you’ll be able to live on the earnings from your investment portfolio and retirement account for the rest of your life. At some point, you will probably have to start drawing on the principal. Be careful not to spend too much too soon. There is a great temptation, especially early in retirement, when desires to travel and spend more on yourself are greater. If you whittle away your principle too quickly, you won’t be able to earn enough on the remaining principal to carry you through the later years.
Your investment portfolio will likely be one of your major sources of retirement income. This is why it’s so important to match your level of risk, choice of investments and asset allocation with your long-term objectives. While you don’t want to lose your investment principal, you also don’t want to lose out to inflation. A review of your investment portfolio is essential in determining whether your money will last.
Continue to invest for growth
Traditional wisdom dictates valuing safety above all else. The problem with this approach is that it completely ignores the effects of inflation. The allocation of your portfolio should generally become progressively more conservative as you grow older, but it is wise to consider maintaining at least a portion of your portfolio in growth investments. There is a simple rule of thumb suggesting that the percentage of stocks in your portfolio should equal approximately 100 percent minus your age. So, for example, at age 60, your portfolio should contain 40 percent stocks (100% – 60% =40%).
Obviously, you should adjust this rule according to your risk tolerance and other personal factors such as family health history and longevity. Diversification and asset allocation remain important as you make the transition from accumulation to utilization of your resources.
We have no control over health care costs, interest rates, taxes and other external factors, which increases the need to control what we can. Whether you run out of money hinges on several factors including how much you’ve saved, how long you need your savings to last and how quickly you spend your money. It is best to tackle these issues before retirement, but it is never too late to start. Be sure to regularly monitor your progress along the way and make the necessary changes. Stay focused and invest accordingly.
Darcie Guerin, CFP®, is Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email firstname.lastname@example.org. www.raymondjames.com/Darcie