Picture this: You've worked hard your entire life, saving diligently for retirement. At age 65, you were living the dream. At age 75, you enjoyed a comfortable, if not luxurious, lifestyle. But at age 85, you inexplicably have run out of money.
How did the ship sink so quickly? There was an iceberg, barely visible above the water but monstrous beneath the surface -- the result of mismanaged distributions and ill-conceived budgeting. It probably doesn't make you feel better, but you're probably not alone in having hit that iceberg.
A nationwide survey of 1,000 adults, released last month from TIAA-CREF, shows that although a majority of Americans understand the importance of receiving guaranteed monthly income in retirement, 38 percent, have analyzed how their savings would translate into a regular "paycheck" in their golden years. Without a distribution plan that provides you with consistent income for as long as you need it, you run the risk of spending too much too soon and living out the rest of your life in the poor house -- or worse, your children's house.
You only get one shot at retirement, and you need to get it right. Consider the following tips for getting the most out of your retirement savings:
Stay invested as a retiree. A traditional investing rule has been to subtract your age from 100 and use the result as the percentage that stocks should represent in your portfolio. This means that as you approach retirement, you'll move away from equities and start investing more in bonds, so as to lessen your overall risk. But increasing lifespans mean some of us could spend more than 35 years in retirement, and going too conservative means older investors may outlive their savings.
A more recent guideline is to subtract your age from 110 or 120, but that still may not be appropriate for everyone. The bottom line is if you need to make your money last longer, you'll need the extra growth potential that continuing to invest in a mix of stocks and bonds can provide. Although that may seem to contradict the apparent logic of not taking risks with your money once you hit a certain age, relying on certificates of deposit, money-market accounts and cash could be far riskier, and may mean your retirement income won't keep pace with inflation.
Watch your spending. For a realistic picture of what you're able to pay out in your golden years, you need to create a retirement spending budget long before you actually stop working. Creating that budget is a necessity to help you avoid draining your nest egg. Your discretionary spending is one of the biggest factors impacting your retirement income, and it's all in your hands.
A retirement budget should include needs (rent, food, utilities), wants (cable, cell phone) and wishes (the fun stuff you want to do in retirement, such as travel, hobbies and entertainment). To cover your bases, make sure also to account for the unexpected, such as a struggling relative in need of financial assistance, repairs and maintenance on the big-ticket items you own and medical care for any furry friends you may have.
Add income-generating investments to your portfolio. Having a diversified portfolio with positions in a variety of asset classes is a key investing strategy designed to help smooth out the ups and downs of the markets. That being said, you should always invest according to your specific, individual goals. If you're looking to build a portfolio that will generate cash, and are more concerned with having enough income than you are with building wealth, you may want to consider adding more fixed-income securities, such as bonds, to your mix of investments.
Bonds tend to provide a higher income than a money market or savings account, but with less risk than stocks. However, keep in mind that bonds aren't risk-free. Here are three factors you need to consider when evaluating bond funds:
Interest rate risk. When interest rates rise, a bond's value typically goes down.
Duration. It is the measure of how likely the bond is to react to changes in interest rates. The shorter the duration, the less effect interest rate changes are expected to have on the bond's value.
Credit risk. This is the reflection of a bond issuer's ability to pay its debts. For example, U.S. Treasury bills are considered to have little to no credit risk. Most corporate bonds are evaluated for credit quality by Standard & Poor's, Moody's Investors Service and Fitch Ratings. Bonds rated BBB or higher by Standard & Poor's and Fitch, and Baa or higher by Moody's, are generally considered "investment grade," or of high enough quality for a prudent investor to purchase them.
Some bond funds you may consider to help you generate retirement income include Federated Total Return Bond, which largely focuses on investing in investment-grade corporate bonds, U.S. Treasurys and U.S. mortgage-backed securities, Eaton Vance Floating-Rate Advantage, which invests in floating-rate bank loans and uses leverage to enhance returns and Aberdeen Global High Income Fund, which focuses on high income-producing securities. Of course, you could also consult an investment advisor, who can look at your overall goals and current outlook, and then select income investments that fit your personal situation.
Whether you're finally in countdown mode or still have 20 years until you retire, you deserve to look ahead to retirement, knowing you'll have the income you need to afford the lifestyle you want. Running out of money is one of the biggest retirement fears, but with a little advance planning, you can develop a strategy to help your hard-earned dollars last a lifetime.
Investing in securities, including mutual funds and/or exchange-traded funds, involves risk including the risk of loss. Diversification does not ensure any investment strategy will be protected from market risk. Investors should consider the investment objectives, risks and expenses of a fund carefully before investing. Before investing in a mutual fund, request and review the fund's prospectus or consult with a professional fee-based financial advisor.
Michael Rittershaus is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. Smart401k's advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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