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5 Steps to Maintain Financial Security in Retirement

A career is spent planning, day dreaming and saving for the day you can stop working with your back, brain and hands. An army of dollar bills has been saved and invested. Now you can stop working for your money and start making your money work for you. But if you're not prepared for financial shocks and sudden bills, stress can derail your long-term comfort and happiness.

The fear that awaits freshly minted retired individuals is the realization that they are no longer working and completely dependent on their financial assets. While you are in the workforce, if the financial markets decide to become dysfunctional, you can cope by working more or for a few additional years. In time, the portfolio will recover. Once you leave the workforce that option is less viable, and a tremendous new stress and fear enters your life. Here's how to protect yourself and prepare for a financial catastrophe.

Keep cash reserves flush. Cash reserves that are too small may leave you exposed in retirement. While in the workforce your emergency reserves should be between three and six months of living expenses. The logic behind this timeless advice is that, within the three to six month period that you are living off your savings, you will find another job. In retirement, the rules are different. You may want to have at least 12 to 18 months of cash reserves. There certainly is an opportunity cost since cash does not earn much these days, but safety and comfort are priceless when volatile times hit.

Maintain the appropriate investment portfolio. Ensure that your portfolio is allocated to enough conservative holdings to cover three to five years of living expenses. Even a well-diversified portfolio can be temporarily derailed during a market downturn. The last thing you would want to do is sell holdings after they have lost 20 to 30 percent of their value. That's the opposite of buy low and sell high. The conservative portion of your portfolio should serve as a bridge to get you through the period that your more aggressive assets need to recover.

Be debt-free. It is hard to get excited about paying off a 1.9 percent car loan or a 3.5 percent mortgage. Borrowing money is artificially cheap right now, but there's a tremendous emotional value to being completely debt free. One of the biggest insecurities during tough times, and especially during retirement, is losing your house. If you can take that risk or concern off the table, it will help you feel more secure during retirement, and there is value in sleeping well.

Be flexible with how you live in retirement. In years when the financial markets are struggling to find direction, be gentle with your spending and nurture your nest egg. When the markets are generating large returns, it is OK to be ambitious and spend a little more on large life events including travel goals and major purchases.

Don't do nothing. A happy retirement is one that includes creative and fulfilling outlets. Make sure you are living the life that you dreamed about with time for friends, family and travel. Having financial freedom does not mean you have to drop off the grid. If there was a job or hobby that you never had time for while working, then this is your time to move forward with those interests.

Your personal journey might include culinary training, bird watching or becoming an avid cruiser. If your skill set ties into the business community, there may be opportunities to pay it forward by becoming a mentor through your local chamber of commerce. With the success of "Shark Tank", "The Profit" and social funding sites like Kickstarter, you may want to see if your community has a local business incubator that you could share your business wisdom with.

Like all other important steps in life, preparation and planning are the keys to success. If you can enter retirement with your eyes open to the obstacles you will face and plan accordingly, you will be that much closer to experiencing the retirement that you spent your working career planning for.

Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".

Brian Preston and Bo Hanson are fee-only financial planners and wealth managers who host the podcast, "The Money-Guy Show". You can follow their blog about managing your finances at Money-Guy.com.

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