As you approach your retirement years, a downturn in the market may have a more dramatic impact on your decisions than when you were a younger investor. Here are 3 steps that you need to take if you are in or approaching retirement.
1: Define your retirement paycheck
As you get closer to retirement, it is essential to answer one specific question: Where will your next paycheck come from. To answer that question, we need to know some specific information:
What are your essential monthly expenses? Housing, food, utilities, medical, insurance, transportation, maintenance costs and personal care. These are the important things that you have to pay for to have a decent standard of living.
How much “guaranteed” income do you expect and how much of your essential expenses does it cover? This is money from Social Security, pension income, or passive sources like business interests or real estate.
How much can you safely withdraw from your retirement nest egg? Your retirement savings will need to pay for your additional lifestyle spending and give you raises in retirement to keep up with inflation. In order to cover this, the money needs to be invested for the long-term in assets that outpace the rate of inflation. A good rule of thumb to keep your money invested is to plan on a withdrawal rate of 4% - 5% in retirement.
2: Have some safe money
Your retirement nest egg is there to provide consistent income over your retirement years. However, if you have to sell your investments during a down-market in order to cover your income, you may not make it up. It is important to have an emergency fund that you can access when the market is down, or when you need money for a large expense. Here are some general rules of thumb:
Any money that you plan on withdrawing in the next 12 months should be held in cash.
Try to hold at least 3 months to 6 months of expenses outside of IRA or 401(k) for quick access.
Consider a Roth IRA as the money for large expenses in retirement. This way you can use the money without an additional tax expense.
3: Consider your Social Security timing
Most of the time, delaying your Social Security benefits until Full Retirement Age or later makes sense since the longer you wait for benefits the higher the monthly benefit amount is. However, if you are faced with selling investments to provide income in a down market, you may want to consider coordinating your Social Security benefits with your retirement withdrawals. In some cases, it may make sense to receive Social Security early to let retirement assets grow and recover. There are many things to consider like how much benefits are reduced and whether you plan on suspending benefits at a later time.
Social Security planning is an important piece of a retirement plan and can be a great tool to help your investment portfolio be more sustainable over time.
Example: Claim and suspend Social Security
For illustration only. Benefits are hypothetical and individual benefits will vary. The illustration assumes the individual was born in 1960 or later and has a primary insurance amount of $2,000. The illustration is for retirement benefits only and does not take survivor or spousal benefits into account. The hypothetical assumes claiming at the earliest possible date and suspending benefits for the maximum possible time. The illustration does not reflect inflation or taxes and all values are shown in today’s dollars. Source: Fidelity.
Don’t worry about what is out of your control
It is easy to get anxious about market volatility, political policy or the latest headline that aggravated you. When it comes to your retirement, it pays to tune out the noise. Be diligent. Plan ahead. Make sure that you feel educated about your next steps. Then take action with what is within your control.
For more information and help, make sure to check out our ebook: How to Retire in the 2020s
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.