Yahoo Finance 4 Keys to Financial Security in Retirement
It's easy to know how much we can spend when we're working: our take-home pay minus the bit that we're saving for a rainy day. But it's not so easy to figure out how much to spend in retirement. That depends on when you retire, how much money you have and your life expectancy. Other factors can also play a role, such as what happens in the stock market and to interest rates, changes in inflation and income tax rates and a host of other factors that are beyond our control. After all, retirees cannot be expected to accurately predict future returns on financial markets, the rate of inflation or even how long they're going to live.
[See: 10 Ways to Increase Your Social Security Payments.]
However, we can identify some factors that will protect our income, no matter what happens in the mysterious world of economics. Here are suggestions in four key areas:
1. Identify income that is stable and predictable. This is income you can count on from month to month and year after year. Your pension and Social Security benefits, and perhaps some withdrawals from your retirement accounts, can reasonably be expected to be there for you every month for the rest of your life. But other income may be more variable. Perhaps you have a part-time job bringing in extra income to your household. But how much longer will you be working? You may have rental income or payments from a trust or settlement that will expire at a certain point. This is not long-term, predictable income.
2. Identify expenses that are mandatory, and those that are discretionary. Your mandatory expenses include your cost of housing, what you spend for food, insurance, utilities and perhaps a car. Your discretionary expenses include such items as travel, entertainment and gifts. Mandatory expenses can differ from person to person. A retiree living in the country needs a car, while a retiree in the city may only need a monthly bus pass. The key is to identify your required expenses that come due every month, no matter what, and isolate them out from the extra expenses you take on just because you can afford them.
[See: 10 Costs You Can Eliminate in Retirement.]
3. Increase your financial flexibility. Make sure that your predictable income at least covers your mandatory expenses. Ideally, you'll have some predictable income to spare. That gives you financial flexibility. Then you can enjoy your discretionary expenses, knowing they can be cut back if your income suffers some kind of short circuit. But if you rely on unpredictable income to pay necessary expenses, you could be headed for trouble.
For example, one retired couple living in upstate New York was sailing along quite smoothly in retirement. Then the husband took a part-time job, and with the extra income they bought a second home in Florida. Less than a year later, the husband suffered a heart attack. He had to quit the new job, just as he was facing extra medical expenses. The couple soon found they couldn't pay for their two homes, plus the extra medical bills. First they maxed out their credit cards, and now the Florida condo is up for sale. Their mistake? They took on additional mandatory expenses with income from an unpredictable source.
4. Know your own limitations. You can't predict how long you're going to live. But you can reasonably assume that your life expectancy is longer if you're 65 rather than 85. The longer your time horizon, the more you have to husband your resources -- your IRA, 401(k) or other retirement savings. Similarly, a retiree who keeps her money in the bank, or has other conservative investments, has a lower return over time, and must account for a lower spending rate. A more aggressive person, with most savings in stocks or mutual funds, might be able to spend more, since the rate of return is likely to be higher. However, the more aggressive portfolio could also prove more volatile -- meaning the retiree might have to severely cut back on spending before the money runs out entirely.
[See: 10 Ways to Repair Your Retirement Finances.]
Some financial advisers offer an easy answer to how much money you can spend in retirement. You may have heard of the 4 percent rule. It says you can safely spend down 4 percent of your financial assets every year without outliving your money. But like most easy answers, the rule is too broad, too simple and may give people a false sense of security. But by considering these four issues when planning your future, you'll hold the keys to unlock the secret to a safe, secure and comfortable retirement.
Tom Sightings is the author of "You Only Retire Once" and blogs at Sightings at 60.
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