Are you nearing or in retirement? Then you need to know these 4 main rules.
Rule No. 1: Wealth is not just a dollar amount.
1) Your necessary spending vs. discretionary spending. Determine how much you must have for mortgages and other debts.
2) Determine your retirement longevity. Be conservative. Do you have family history showing that you will live to be in your mid 80s? Add at least 5 years to the number you have in mind.
3) Determine the different sources of income you have. Which of them are guaranteed, such as monthly pensions versus other types of savings accounts, such as 401(k)/IRAs, etc.? Depending on this, you will be able to calculate the annual amount you need in retirement, and depending on your investment profile, you will be able to design a plan to achieve this goal taking the least amount of risk possible.
Rule No. 2: A penny saved isn’t a penny earned — It’s more.
Let’s assume you have a $1,000,000 net worth and spend $100,000 annually in retirement. This will last you 10 years. Are you better off going to work for 10 years, earning $50,000 per year, or, are you better off cutting household expenses by the $50,000 for those 10 years?
If you go back to work and earn $50,000 each year, assuming you are in the 22% tax bracket, you will have after tax earnings of $39,000 each year. Assume that you continue spending the same $100,000 over those 10 years and earn annual returns of 5%. After 10 years you will have a total net worth of $832,280.
However, if instead you were to decide to cut retirement expenses by that same $50,000 and earn no income during this 10 year period, and receive the same 5% annual return, your net worth ends up $968,555 after 10 years. This results in 18% more retirement wealth. A dollar saved is worth more than a dollar earned!
Rule No. 3: He who hesitates cashes in.
Often times, individuals claim social security as soon as possible, or as soon as they retire, to avoid spending down their retirement savings. However, claiming benefits ASAP can be a mistake. When you delay social security you earn a higher benefit later. There is a breakeven point, which is the age where the individual earns the same total benefit when claiming early and delaying. For example, let’s assume an individual claims early, say age 62 and receives a reduced benefit of $10,000 per year. Assuming no cost of living adjustment, at age 77 they will have received 15 years of benefits totaling $150,000. However, assume they delay benefits until age 70 and receive an increased benefit of $21,429 per year. At age 77 they will have also received $150,000 in total benefits. Therefore, in this scenario, the breakeven point is at age 77. If the individual believes they will live beyond age 77, then they are better off delaying.
I can’t state this strongly enough — when delaying social security you’ll be buying the greatest annuity that exists, an income stream that is guaranteed by the government, keeps pace with inflation and has a survivor benefit. And each month you wait to take Social Security, it gets better. For instance, delaying payments from age 66 to 70 can raise your monthly benefit 32 percent, even before cost-of-living increases kick in.
Rule No 4: Piggy bank your coins.
There are a variety of different approaches to managing money in retirement. One of the most known approaches is withdrawing a percentage of your liquid net worth, for example 4%. According to several time tested studies, withdrawing 4% from a balanced stock/bond portfolio very likely will last beyond 30+ years in retirement. However, there is more to consider than just this. Depending on whether most of an individual’s net worth and income is in guaranteed pension funds, or whether their retirement wealth is in savings accounts, 401k, and IRAs is the first consideration.
Next, consider how much of your spending is mandatory versus discretionary. If in retirement you find that all of your debts are paid off and your real main choices are discretionary expenses such as vacationing, dining out, and entertainment expense, then maybe you can withdraw more earlier in your retirement as you can always dial back these discretionary expenses. However, if an individual has obligations to mortgages, car notes, and other debts, being more conservative in early retirement could pay off.
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