Outliving Your Money

Many of us who are baby boomers devote considerable time and effort to maintaining our physical health.  We exercise, take vitamin supplements, and consume organic foods in our quest for long and healthy lives.  This is perhaps the greatest challenge facing our generation, because living that long and healthy life may place considerable stress on our investment portfolios.  

Here are a few ideas to help your money last as long as you do:

Begin with a clear and accurate understanding of your living expenses. Having “enough money” is only part of the answer.  Contrary to popular belief, living expenses rarely decline upon retirement, so it’s absolutely essential to understand your expense structure…present and future.  If necessary, use a program like Quicken to help identify and capture your cash flows. 

Focus on income generation.  Your total retirement income will likely be derived from multiple sources including but not limited to social security, rental income, interest, dividends, annuities, and so forth.  Investment diversification is always important, but it is especially vital during retirement.  Consult with a wealth management professional to help ensure that you are properly diversified. 

Control your withdrawal rate.  As a general rule, it’s wise to limit your annual withdrawal rate to a maximum of four to five percent.  It may be may appropriate to exceed this rate during an excellent year;  however, it may be necessary to withdraw less during a down year in order to avoid eroding principal.  Think of it like this:  for every $40,000 to $50,000 you wish to spend in a given year, you need, at minimum, $1 million of investments. 

Don’t forget stocks.  Many people make the mistake of identifying their investment time horizon as the amount of time remaining before retirement.  A 60-year-old who plans to retire at age 65 may see his or her time horizon as only five years.  In reality, this individual is likely to live well into his or her eighties…or beyond.  Stocks are essential to keeping pace with inflation, so they need to be seriously considered as part of your retirement portfolio. 

Last but not least, remember that health is truly a wildcard and potential game changer when it comes to outliving your money.  Given the ever-changing political landscape and growing pressures on government programs, it will be increasingly difficult to predict and manage health costs.  Take a long and hard look at your disability and long-term care insurance coverage.   

Here’s to your healthy, long, and prosperous life!

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