The decision to retire can be scary. You leave behind the security of a monthly paycheck, and hope that your savings will be enough to pay your monthly bills. There are certainly many unpredictable events that could go wrong. You could develop a health problem, see your monthly budget upended by inflation or experience investment losses that crush your nest egg. But there are also strategies that you can use to prevent these problems. Here's how to significantly reduce your retirement risks.
Inflation. The prices for most things increase steadily over time. Inflation can be pretty devastating to those who are no longer getting salary increases because it can erode the purchasing power of your savings. Just two decades of 3.5 percent annual increases can equate to a doubling of costs. But inflation is not spread evenly among all types of expenses. The costs of health care and rent tend to go up every year, but innovations can help bring other costs down. There are many ways to lower expenses if you are flexible with how you spend your time. For example, you can reduce your entertainment costs without sacrificing quality by switching from cable TV to one of the many lower cost streaming services that have sprung up to compete with it. You can also keep some of your savings in investments that have historically kept pace with inflation. A few financial instruments, including Social Security and some types of government bonds, are even guaranteed to keep pace with rising costs.
Investment losses. The volatile nature of investment returns means that you can't assume your portfolio will earn a certain amount every year. This can make life difficult for retirees who need to use investment income to pay their bills. However, you can reduce your risk of losses by increasing the proportion of your portfolio that is invested in more conservative assets that are less likely to lose value. Consider adding more predictable income streams, such as bonds, to your portfolio. Sure, the theoretical amount your portfolio could earn will be reduced, but so is your risk of losses. This move lowers the risk you are taking, which can help you to sleep better at night.
Health problems. Life threatening diseases can occur even among people living a healthy lifestyle. However, it's common knowledge that you can significantly improve your quality of life if you spend time taking care of your body. Social interaction is important. Making more friends and forming deeper relationships can help to keep you healthy. Exercising gives you more energy to try new things and maintain a busy schedule. Physical activity also releases chemicals called endorphins that are known to make you happier. Maintaining good health is easier and a lot less expensive than fixing a problem after years of living an unhealthy lifestyle.
Running out of money. Choosing lower risk investments can certainly help your money to last longer. But the biggest lever we have in avoiding running out of money is our ability to be flexible with our spending. Many studies of safe withdrawal rates assume a retiree spends a constant amount each year, typically 3 to 4 percent of the portfolio balance upon retirement, and that amount is adjusted only for inflation. But in the real world your spending will fluctuate, and you have the ability to decrease it when you need to. By simply monitoring your portfolio value and reducing your spending when market values take a dive, you can significantly reduce your chances of spending down your savings too quickly.
David Ning is the founder of MoneyNing.com.
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