The term "living paycheck to paycheck" has become the go-to phrase for people who are just getting by. They mostly have their monthly income figured out, but there's no emergency fund— and they aren't putting any money aside for big purchases or long-term savings. If an unexpected expense comes up, it either goes on credit or it can blow their whole budget out of whack.
We tend to think of it as a problem for working families, but the same thing can happen in retirement — even if you know your combined income streams will be enough to cover your basic needs. You're really not prepared if you don't have a plan for how you'll pay for the rest of your costs — things you'll need and things you want — as well as how you'll keep growing your money for the future.
Every plan should have what I call the "Four Pillars of Retirement Success": income, liquidity, safety and growth. Each has a role in your retirement — and when all four are in place, your plan has a better chance of holding up for the long haul.
Here's what you'll need:
When you create your retirement plan, making sure your monthly expenses are covered has to be your top priority. Your Social Security benefits and pension will take care of a large chunk of your costs, but you may need to use your investment savings to fund the rest. This money should come from reliable sources, such as CDs, Treasury bonds, annuities or high-grade corporate bonds, so you can be confident your bills will always be paid. And there should be an unwritten rule that this is money you won't touch for anything other than your basic day-to-day costs.
Here's where a lot of retirement plans go wrong. Sometimes it's an unexpected expense— a medical bill or car repair — that can send you searching for funds. But it also could be a big trip you want to take with your family, or a new car or home renovation. Every plan should include money that's set aside for emergency and discretionary expenses. If your entire nest egg is invested, you could end up losing money if you take withdrawals sooner than you planned. Or you might end up putting off getting the things you want and need. It's a good idea to have a substantial emergency fund set aside (at least six to 12 months of income). But you also should try to have enough money available to fund the things you might want to do or buy in the first 12 to 18 months of your retirement. And if and when you use that money, you should have a strategy in place for how it will be replenished.
When you retire, you need to flip your mindset from accumulating as much money as you can to keeping the money you have. Your plan should address all the little ways life can chip away at your savings, including market volatility, taxes, inflation and health and long-term care costs. Talk to your financial professional about the many strategies and products available that can help you protect your nest egg. I often recommend using a time-segmented approach using three "buckets" of money. For example, let's say you're age 60 and have $1 million saved for retirement. You might put $88,000 into ultra-short bonds and money markets, $76,000 in short-term bonds, and $165,000 to $200,000 in annuities. This plan combines your short-, mid- and long-term needs and would provide $1,500 a month for life. The rest of the money would be allocated to growth.
Most Americans can expect their retirement to last 20 years or more, so your plan should include some way to stay invested for growth. This is a delicate balance in retirement: You don't want to be too aggressive, but you will want to earn enough to stay ahead of inflation so you don't lose purchasing power. Going back to the example above, you'd have approximately $636,000 of your $1 million remaining to allocate toward growth, perhaps with 59 percent in domestic and international equities, 37 percent in domestic and international fixed income, and four percent in cash. Besides diversifying your asset allocation, you also may want to talk to your adviser about using both active and passive management strategies.
Retirement should be a relaxing time when you pursue your dreams, try new things and enjoy the lifestyle you planned and worked hard for. It shouldn't be a time for scraping by or worrying about where the money will come from every time a new expense comes up.
By building your plan with the Four Pillars of Retirement Success, you can be more confident in your spending from the first day of retirement to the last.