First Person: We're Building Flexibility Into Our Retirement Planning

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I was reading an interesting article on MSN Money the other day that had me thinking about how we build flexibility into our retirement planning. The article was about the secret to early retirement, and noted that, "Among those who want to retire early, the ones I've seen who are most successful build a little bit of flexibility into their system," says Brent Burns, the president of Asset Dedication, a portfolio engineering firm that works with independent financial advisers and their clients on strategies for retirement income predictability."

While it's impossible to predict the future -- and even though we still have a decades before retirement -- my wife and I feel that it's better to be safe than sorry. Therefore, we've taken several steps to help us build a certain level of flexibility into retirement planning.

Not Being Focused on any One Asset or Income Source too Heavily

I know that there are some people out there -- whether out of necessity or not -- who rely mainly upon Social Security as their main source of income. With the current uncertainty surrounding this "entitlement" as many people refer to it (I prefer "investment" since I've paid into the system for years), I don't like to be too dependant upon Social Security as a main source of retirement income

Instead, I prefer to think of Social Security as one part of multiple income streams that I hope are there in retirement. Pairing Social Security income -- even if it's greatly diminished by the time I reach retirement age -- with things like retirement account income, savings, income from outside work, resale, or whatever, and any other investment income, I can minimize my reliance upon any one source of income. I consider it an income diversification. This way, if any one or even two sources are diminished or go away completely, we won't find ourselves destitute.

Knowing How and Where to Cut Costs

I pride myself on being able to find savings and cut costs in almost any and every cost category in our family's budget. Finding these savings helps keep our spending low. According to the MSN Money article:

"The key to a successful early retirement is realizing that "everything centers around spending policy," says Jonathan Satovsky, the chairman and CEO of Satovsky Asset Management in New York.

"If your spending rate is under 3%, you can pretty much weather any storm, as long as you are not speculating and putting everything on red," he says. "But as your spending rate creeps past 5%, you are forced to take more risk, and you need the world to cooperate to be able to insulate yourself from the chaos.""

I maintain a budget that tracks all aspects of our income and spending. This makes it easy to see how we're progressing financially, make comparisons over time, and generally have a better understanding of how much we spend, where, upon what, and what portion of our total income our spending accounts for.

Again referencing Joe Mont, author of the MSN Money article:

"A crucial step is to craft a realistic post-retirement budget -- an honest assessment of future spending needs. Doing so requires more than the "guesstimate" many use to predict their future finances. All assets -- retirement accounts, Social Security, real estate and a general portfolio -- need to be tallied with realistic expectations for future gains and losses. Inflation, though held in check recently, has to be considered as imminent. A reasonable assumption, 3%, will erode savings at a compounded rate.

Reducing expenses can mean selling a home and downsizing. It can include moving to another state -- or even outside U.S. borders -- to reduce the cost of living and medical expenses."

Continued Income Streams

As we near retirement, I'd like to try to diversify our income, taking it from more than just Social Security and retirement accounts to a variety of income sources. Having numerous incomes can help keep us prepared in the event that one or two of them fails.

Whether this means continuing our work in a more limited capacity in retirement, earning income through online or community resale options such as consignment shops, eBay, Craigslist, or similar sites, or earning rental income from properties or land, by diversifying income streams, we can build more flexibility into our retirement and keep from putting all our eggs in one basket.

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