Aspiring retirees have many decades of retirement life they need to plan for. There are also a wide variety of things that could go wrong with your financial plan, ranging from poor investment returns to high inflation. How your investments will perform and how much the prices of basic goods and services will increase is difficult to predict, and could have a devastating impact on your retirement finances if you guess wrong. Here are several things you can do to help your portfolio deal with a catastrophe:
You still have human capital. Retirement doesn't have to be forever. If you begin to find it uncomfortable living on your fixed income, you can always find ways to earn some extra spending money. There are a variety of ways to increase your income if the markets don't cooperate and you suddenly find yourself wanting to increase the chances you won't run out of money or to get a little extra breathing room in your budget. Calling yourself retired while still earning income is an increasingly popular route to take.
Tap wealth outside of your portfolio. Being completely debt-free, including owning a paid-off home, is a worthy goal for retirement. That means you'll always be able to downsize your house if you ever need more money to spend in retirement. A move can boost your finances in two ways: You get to invest the additional home equity and will have fewer ongoing expenses with a smaller place. Just watch out for the transaction costs of selling your home, finding a new place and moving.
Social Security will be there for you. I absolutely expect to receive income from Social Security in retirement. Congress will not let the program die due to its popularity and importance to taxpayers. This income will be a good cushion when I elect to receive the paychecks. And the payments are adjusted to keep up with inflation each year, so at least this portion of your income will keep up with rising costs.
Have a plan to cut back. I could retire right now, but I would rather live a more comfortable lifestyle in retirement, which is why I choose to continue padding my bank account. After I pull the trigger to retire, I can always dial back my spending to reflect the realities of my investment returns. My budget includes a healthy dose of unnecessary spending that I could cut back on if I needed to. The good news is that happiness and spending aren't directly proportional. If I really have to ratchet down my spending at some point in the future, I can still be happy.
Use innovations to cut costs. Most of us are spending more on discretionary expenses because we are buying things that simply didn't exist years ago. Nice clothes can be had for not much more than a decade ago, but we are spending more because we now have a $100 monthly smartphone bill. But there are also ways technology can save you money without giving anything up. For example, I used to negotiate for a lower cable TV bill, but now I stream entertainment through the Internet for a faction of the cost. And shopping around for the best deal is easier than ever on the Internet. I am sure that the future will include more ways for me to save without sacrifice, as long as I take the time to look.
Trying to predict what will happen decades in the future is impossible. But you don't need to delay your retirement date indefinitely out of fear. Make a reasonable plan and add a dose of margin for safety. You will find a way to cope with stock market declines and inflation if you stay flexible in retirement.
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