Both recent retirees and those who are planning to retire in the near future are having to navigate some turbulent waters lately.
Slumping stocks, a slow economy, and The Fed signaling further rate increases means retirees must make wise decisions in order to ensure a successful retirement.
But a good financial plan can make it possible to retire comfortably, even in a difficult economy. Here are three steps for recent retirees or those who are about to retire that will help them navigate this big life transition.
1. Examine Your Spending
Many people don’t have a budget for their household during their working years. And they don't want to live on a strict retirement budget. Instead, take a different approach. Add up all the annual spending for the past three years to see macrotrends in your spending patterns. To find your average spending, collect your bank and credit card statements.
This exercise is designed to determine if your current spending pattern is sustainable over the next 30 years. The couple or individual must be able to sustain their lifestyle on their savings and guaranteed income sources like Social Security benefits.
Most new retirees realize they've got to fill their time with at least one major activity or hobby. This usually involves spending money. Some people spend large amounts on their homes and also on international and domestic travel. Some hobbies, like restoring classic cars, can easily cost thousands of dollars, and can stress your financial plan.
There are some simple ways to reduce spending. You can reduce monthly subscription payments, increase your auto and home deductibles to lower insurance premiums, travel during off-seasons, and take on home improvement projects rather than hiring professionals.
There are bigger changes that can be made – some people might decide to downsize their house or sell an extra car to save money.
2. Create a Plan to Survive a Down Market
It is normal to worry in uncertain times. However, those who have a solid financial plan will be able to weather the storm without making costly mistakes.
Fear is often the driving factor behind selling investments at a loss. Many people sold their stocks after the March 2020 market crash. Markets quickly reversed their course and reached record levels for the next two years. Some investors lost 20% of their stock value, and this can lead to them locking in their losses, which could prevent them from reaping the benefits of a market recovery.
A possible recession is approaching, and one way to prepare is by creating a bond ladder.
A bond ladder allows someone to buy a variety individual bonds with different maturity dates. This is the date that an investor receives their interest payment. A person could invest $100,000 to buy 10 bonds with a face value of $10,000 each. Since each bond will have a unique maturity date, investors will receive a steady stream of income if they are held to maturity.
3. Understand You'll Need Enough to Last 20-30 Years
People in their 60s who plan to retire with investments assets of between $1.5 million-$5 million may feel secure. But they don't always know if the money they have will last them for at least 20 years, or longer. So it's recommended that you you determine your sustainable withdrawal rate and longevity risks by creating a plan that is based on statistical models.
The population of Americans 90+ nearly tripled between 1980-2010 to 1.9 million. This number is expected to continue growing over the next 40 years. So new retirees will need to have enough money to be comfortable for a long period of time, and they may not be able leave any money to their heirs.
Each plan can be tailored to meet the needs of an individual or couple. But any plan should be used to determine a steady rate of withdrawal that will last a lifetime. Some people might want to spend everything, while others may prefer to leave money for their kids. Every plan is designed to withstand stress from events like a recession or major geopolitical change.
A good plan should involve segmenting assets into buckets so you can weather market volatility while also being prepared to capitalize on growth opportunities as the market recovers. It is important to be intentional about your retirement income strategy because the spend-down phase of your life is very different than the mindset of accumulation.
There are likely to be difficult times ahead. But it's possible to retire in volatile markets with confidence if you have a thoughtful spending plan, and a strategic income plan.