It is presidential election time again, and we hear that familiar question: Are we better off than four years ago? This is an important question for retirees because, after retirement, they often no longer have a consistent or substantial paycheck.
The conventional retirement plan is to maximize your nest egg before leaving the workforce. Then, after retirement, you increase bond allocations for safety and also withdraw at a safe rate of around 4 percent. When drawing down your personal savings it is difficult to be better off financially than you were four years ago, but that doesn't have to be the case. Here are some ways you can grow your net worth in retirement:
Stay invested. It's important to stay invested even after you retire. Over the long term, stocks have historically outperformed all other investments. The typical life expectancy for U.S. residents is near 80. This means many of us will be in retirement for a long time. We need to be invested in the stock market to keep our nest egg growing. Keep in mind your life expectancy when you rebalance. At the beginning of retirement, it's better to have enough of a stock allocation to take advantage of long-term growth. Another option is to invest in dividend stocks so you can benefit from the price appreciation and have some additional income.
Part-time work. A small paycheck from a part-time job can be a big help in retirement. Retirees have a lifetime of experiences they can use. It's better to keep busy in an active retirement than to let those skills go stagnant. There are many ways to make some extra money such as tutoring, coaching, and consulting. One great way to generate extra income is to own a small Internet business like a blog or an online store. These online ventures might not bring in a big paycheck, but they have a low cost of entry, and they will keep your mind active.
Diversify your income. Diversifying your income is a way to hedge against an economic downturn. The last few years were bad for stocks, but it was great for rental properties. It's important to have income streams from many sources, so if one sector is slowing down temporarily another could pick up the slack. There are many ways to generate extra income including rental management, stocks, bonds, CDs, peer to peer lending, online properties, and freelancing. The key is to build your income streams before retirement. That way, it will be easier to live off the return instead of the principle.
Decrease spending. This is an easy net worth building task that is not very popular. You can decrease your expenses during the down cycle. If your investments are not throwing off enough money in a certain year, then consider cutting back on luxury spending. Luxuries are not only big ticket items, but also indulgences we often pay for without thinking, such as an expensive cup of coffee. Traveling is a popular past time in retirement, but it can cost a lot of money. One way to reduce travel expenses is to visit nearby locations instead of traveling internationally. Of course, if your budget is bare bones already, then this is probably not a good option for you.
Growing your net worth isn't always a priority in retirement, but it's better than spending down your retirement savings every year. If you can even maintain the same net worth year after year in retirement, you are doing quite well. The principle remains the same as during pre-retirement: Spend less than you earn and you'll grow your net worth over a long retirement.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.
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