How to Not Run Out of Money in Retirement
Regardless of how much money someone has, many retirees and pre-retirees fear running out in retirement. We recently surveyed?Falcon Wealth Advisors?clients and learned that for many, despite having saved and invested for decades, running out of money is their biggest concern.
This concern is understandable, as it can be a big adjustment to begin spending from the portfolio that you spent so long building. Thankfully, at Falcon Wealth Advisors, we develop signature?financial plans?for our clients, and I’ve seen how having a financial plan on paper (or now a days on a computer screen) helps calm the anxiety many people have around finances and the future. To learn more about how you can avoid running out of money in retirement, please see the blog post below that recaps a recent conversation Falcon Wealth Advisors Founder and Wealth Advisor? Jake Falcon, CRPC? ,?and I had on?Upticks.
Jake:?Each time our team meets with a client, we look at the trajectory of their financial plan. We’ve found we have three types of clients:
Needless to say, it’s important to meet with a fiduciary wealth advisor and review your financial plan’s trajectory to make sure you’re comfortable with it. Some people are comfortable with the?possibility?of potentially running out of money in their 90s and living off Social Security, but some are not.?
Cory:?Yes, I think it’s important to focus on that trajectory, rather than what your portfolio will be worth at a certain age.
The second step we’ll discuss is to spend less than you make. Whether you’re working or retired, this is a key principle of financial health, and it can be especially challenging in this inflationary environment.
If you’re retired, it’s important to understand how much income?your assets are generating for you—through stock dividends, bond interest payments, Social Security benefits and more—and if it’s realistic to align your spending with that number.
Jake:?If your financial plan shows a downward trajectory, the quickest way to turn it around is to ensure your spending doesn’t exceed the income you’re bringing in each month. We recommend adding up all your income sources and then aim to spend less than you’re bringing in. And our team of financial planners can help you “stair-step” your financial plan, which allows you to spend the money you need today, as you know you will be able to cut spending down the road because you’re paying off a car or mortgage, for example.
Cory:?I think the?idea?of spending less money in the future is easier than actually doing it. For some it’s possible, but for others it may not be. If you don’t think it’s realistic to spend less in the future, the prudent move is to begin training yourself to spend less now and establish new habits.
Jake:?Our third step to avoid running out of money in?retirement?is to invest wisely by choosing both growth investments and income investments in your portfolio. Growth investments help fuel your financial plan in the long term while income investments provide you with income for your day-to-day living expenses in the present. At?Falcon Wealth Advisors, we help clients make sure these types of investments are balanced properly in their portfolio. You don’t want to have too much of your portfolio invested in income stocks, because it may not be able to grow enough to protect you against inflation in the long term. And you don’t want too much invested in growth stocks because you could be forced to sell them when they’re down in value.
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We encourage clients to have at least 5-10 years worth of living expenses in investments that offer relatively stable income, like bonds and cash—with most of the rest of their money focused on growth. We also help clients stay disciplined with their investment strategies in volatile years like 2022.
Cory:?That’s a good point about discipline. I read earlier this year that a cardinal sin of investing is turning a temporary loss into a permanent one. This is especially important for a retired person, as they don’t have as much time to recover from a mistake, like selling an asset when it’s down in value.
Our next step is to be willing to change. While a customized financial plan is critical to your success, it’s not a roadmap that’s set in stone. It’s important to recognize that life will change, especially when you’re planning for a 30+ year retirement. The more open you are to change, the more comfortable investment experience you can have, and you’ll be less likely to run out of money in retirement.
Jake:?Indeed, sometimes life events happen, and we have to spend more money than we expected. Just because a financial plan works well today, that doesn’t mean it will work well forever, and that’s why we meet with clients at least once a year to review their plan.
The last step we’ll discuss is to align your spending with your values. If you’re like me and you value playing golf but you don’t care much about coffee, it makes more sense to focus your spending on golf and not daily trips to Starbucks. It’s important to make sure our spending aligns with how we enjoy spending our time.
Cory:?If you’re thinking about what’s important to you, I recommend regularly reviewing your options for necessities like homeowners insurance or auto insurance. I don’t feel loyalty to any one company for products and services like these, and I think it’s important to regularly make sure you’re getting the lowest price possible with a reputable insurance carrier, so that you have more money to spend on your passions.
Jake:?This may sound daunting to some. One way to mitigate this is to pick one bill to review once a month. Maybe you’ll realize that you don’t need cable or you can switch to a less expensive cell phone plan. And our team of financial planners at?Falcon Wealth Advisors?can talk you through your spending and help you make sure it aligns with your values. We even have a “building blocks” exercise that helps you categorize your spending and see how much you’re spending and on what, so that you can make any necessary changes.
I hope readers can see that with some careful planning and an open mind, they can take concrete steps to avoid running out of money in retirement. If you would like to meet with?Falcon Wealth Advisors?to review your financial plan, please reach out. And if you don’t have a financial plan, I highly recommend you contact us, as planning is so critical for a successful retirement. You can reach us directly at?[email protected]?and?[email protected].
Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.
Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.