If you are considering retirement or have already left the workforce, maintaining a steady stream of income is essential to a comfortable lifestyle. That means having enough money each month to pay your household bills with some extra dollars to spend on travel, recreation or hobbies.
Unless you have the good fortune to be eligible for a traditional pension, you will probably need to rely on the funds that can be generated by your investments and your Social Security payments. In other words, you have to switch gears from focusing on savings to managing your income and your spending.
Developing a sound financial strategy for retirement begins with thinking about your personal goals. Do you have a spouse or partner to consider? Do you want to leave a large estate to your children or a legacy to a college or charity? Or would you prefer to travel the world and enjoy the results of your hard work while you can?
Next, you need to think about the financial risks you may face in retirement. While many retirees worry the most about their assets losing value in a market downturn, inflation is actually a greater long-term risk, since it robs your assets of purchasing power. That’s why putting all your assets in “safe” places like money market funds or Treasury bills is usually not a good idea.
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Returns on those assets are usually below the inflation rate, so the buying power of your portfolio could shrink every year.
Other financial risks include longevity. Americans today are living longer than ever, raising the risk of outliving your income.
Let’s say you have $1million in your retirement portfolio and withdraw $100,000 a year for expenses. In this example, your savings would only last for a little over 10 years (depending on the interest on those funds before withdrawals).
On the other hand, you might be faced with a medical emergency or require expensive long-term care later in life. Therefore, you should keep at least a portion of your portfolio into liquid assets, like a money market fund, that you could tap immediately if needed. You may also want to talk with your advisor about purchasing some type of long-term care insurance policy that could help cover the costs of a nursing home or other assisted living residential program.
After reviewing your retirement goals and risks, the next step is to analyze your expenses. How much money will you need to cover food, utilities, shelter, clothing and transportation? Remember that some of those costs, such as commuting to work or purchasing career attire, may decline in retirement.
For example, you might have to maintain an income of $60,000 a year or $5,000 a month to cover those necessities. Fortunately, Social Security payments can usually cover a significant portion of those costs.
If you expect to receive $2,000 a month from Social Security, your investments would only need to generate $3,000 a month to make up the difference in this example. Of course, your investments ideally would produce more than $3,000 a month so you could have some extra money to spend on things you enjoy.
If there is still a gap between your expected monthly expenses and your desired income, there are several solutions. You could delay retirement for a year or two in order to continue building up your investments. That would also increase the size of your Social Security payments, which are based on age at your retirement. Other options include downsizing and moving to a less expensive home, selling one of your household vehicles or other personal possessions.
Finally, you should talk with your advisor about retooling your portfolio to generate the income you need for your lifestyle, protect against the risks of retirement, and provide an estate for your heirs. Remember there’s no “one-size-fits-all” solution to the financial issues of retirement, so take the time to develop a strategy that’s well-suited to your personal situation.
Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS