The Pillars of Retirement Planning
More than three-quarters of American workers are living paycheck to paycheck – 78 percent, in fact. They’re covering their monthly expenses, but they lack an emergency fund and aren’t able to save for the long-term either. It’s a precarious way to live, with one unexpected expense having the power to create a financial tailspin. Unfortunately, this isn’t just a concern for workers.
Although the phrase “paycheck to paycheck” tends to refer to working families, retirees can end up in the same risky position. Maybe you’ve planned ahead well enough to know that your retirement income streams will cover your basic expenses, but are you prepared for a rainy day? For a fulfilling and stress-free retirement, you also want to be able to handle emergency expenses and ensure you’re growing your money for the future.
Enter the four pillars of retirement success: income, liquidity, security, and growth. Only with thoughtful attention to all four can you successfully plan for the long-term and, with American life expectancies on the rise, your retirement could be longer than you think.
Let’s break down each pillar:
Pillar #1: Income
The first rule of retirement planning is to ensure your monthly expenses will be covered by dedicated income streams. Ideally, you’ll have Social Security and a pension but think about other reliable sources of income for your basic expenses. Consider annuities, CDs, Treasury bonds or high-grade corporate bonds. You want to feel confident that your bills will get paid each month, so make a rule for yourself that these income streams won’t be used for other purposes.
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Pillar #2: Liquidity
When this pillar is ignored, your retirement planning can go very wrong. Even if you have your monthly expenses covered through your income streams, you also need a fund meant for emergencies and one for discretionary spending. Your emergency fund should be substantial – six to 12 months of expenses – so that an unexpected bill won’t cause hardship. Remember: if you invest your entire nest egg and then need to make withdrawals sooner than planned, you could end up paying penalties. It’s best to have cash on hand instead.
Once you have your emergency fund in place, you’ll also want to start a discretionary spending fund. This way, if you want to take a vacation with your family or join a new golf club in retirement, you already have a dedicated fund for these purchases or memberships.
The third step of your liquidity planning is to know how you’ll replenish your emergency fund or discretionary spending fund in the event you use them. More than likely, you will at some point.
Pillar #3: Security
Many retirees get tripped up on mindset. After all, you’ve spent decades working to earn and save as much money as possible, and it’s a big adjustment to move into a phase of spending that hard-earned money. It can feel a little scary and leave you insecure. In order to make the transition easier, focus on how you’ll keep as much of your money as possible. Life has a way of getting in the way of your best laid financial plans, and everything from taxes to inflation may erode your savings over time, so plan for ways to build safety nets into your strategy.
The best way to do this is to work with a trusted financial advisor who can share the products and strategies that will offer you the very best protection for your nest egg. For instance, you may benefit from a time-segmented plan that takes into account your short-term, mid-term and long-term needs with an asset distribution that spans money markets, short-term bonds and annuities alongside a strong growth strategy. A financial professional can help you determine how much of your savings to put in each bucket for optimal financial security.
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Pillar #4: Growth
As mentioned above, Americans are living longer than ever before, meaning your retirement could easily last twenty to thirty years. Obviously, this calls for a strong focus on growing your assets even as you begin to spend them. Inflation, in particular, will leave you with less purchasing power over time unless your growth strategy is aggressive enough to keep your earnings ahead of inflation. For instance, your financial advisor may recommend diversifying your assets to include domestic and international equities as well as domestic and international fixed income.
Don’t set yourself up for a retirement that has you living paycheck to paycheck. Use the four pillars above as guideposts for creating a retirement that feels both fulfilling and secure.