Getting ready for retirement involves more than just calculating how much you will need, and the rate at which you can draw down your savings. The years before you retire are a crucial time to prepare both financially and psychologically.
Often, many retirees underestimate their expenses, get bored without a daily grind and panic over market corrections. Especially when the media is shouting about bank failures, historically high inflation numbers, a ballooning national debt, a hawkish Federal Reserve and countless predictions of a looming recession.
Here are a few exercises that you can take to get ready for the reality of retirement.
Know Your Retirement Expenses
Test the retirement expense waters. Generally speaking, when you hear stories about people who run out of money in retirement, it has little to do with market actions or portfolio losses. Most retirees often underestimate expenses, both before and in retirement. People just seem hardwired to believe that they spend less than they actually do. A good recommendation is to test your estimate out and actually live on your retirement budget while you are still working.
By taking the time to make sure you can actually live on your assumed expense amount, you might avoid a lot of problems. Underestimating income needs may become a big problem when you try to maintain reasonable withdrawal ratios in retirement that may enable your future income to grow, adjusting for inflation. If it turns out that you have a hard time living within your planned spending allowance, then you need to take action before you retire, or consider working longer. As part of this planning process, our Wealth Advisors can assist in projecting and understanding your essential, discretionary and one-time retirement expenses.
Have a Plan
Plan to retire to something, don’t just leave work. The concept of retirement is changing, and gone are the days of boredom or just sitting on the porch. People are postponing retirement, changing careers, opening small businesses, or consulting in their area of expertise. Some of this may be out of necessity, but perhaps more of it is out of the joy that people find in contributing their knowledge to society. Just because you are retired, it doesn’t mean you can’t do something productive and enjoyable. Another good suggestion is to begin to find a hobby like golf, reading, or other activities you enjoy that can fill the day.
Run Stress Tests
Be prepared and anticipate the worst from the markets. Ideally, you should draw down your portfolio as little as possible while relying primarily on its growth for income. Your strategy should aim to maintain your annual withdrawal rate at no more than 5% of your total assets. In normal times, you need at least 3% returns from the markets to keep the portfolio expanding enough to keep pace with the rising cost of living. However, we know these figures are subject to change, since there is no investment or strategy that can provide returns with anything resembling a guarantee. Expect to suffer volatility and setbacks.
Long-term market returns rarely fail investors, but short-term investor reaction very often does. Every rolling 10-year period between 1927 and the present day had an average 10-year return close to double-digits. The same holds true for 30-year rolling periods. Over the long run, a balanced portfolio generally comes out okay. Just resist the urge to sell in panic during a downturn. History shows there has been more than a dozen bear markets since the end of World War II. The average loss during these periods was about 30%.
At Biondo Investment Advisers, we are prepared to address your retirement-related concerns. Planning your retirement budget in advance is important, but monitoring your expenditures once you retire may be even more important. Your retirement income plan might need to be adjusted to take future changes in your expenses into consideration. With regular meetings with your wealth adviser before and during your retirement years, your investment plan can continue to meet your needs as they change over the course of your lifetime.
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