All you’ve heard for years is that you need to be planning for retirement, and you feel like you did. Between Social Security and retirement plans, you’ve got enough to cover your necessary expenses with a little bit left over for fun or just-in-case moments.
But now that you’re actually retired, should you start to become more conservative with the nest egg?
Not really, says Alynne Zielinski, certified financial planner and manager of financial planning at Aurum Wealth Management Group in Cleveland.
“You could have a more aggressive investment strategy based on your financial plan results,” she says. “Or you could invest for your children’s or grandchildren’s longevity.”
Knowing how and what to spend and invest is the key for sustaining a lifestyle that includes your needs.
Ultimately, the biggest behavior change that occurs during retirement is a shift from accumulating wealth to distributing it.
“You are now using your accumulated savings to fund retirement and need a sound strategy and budget to mitigate financial risks,” Zielinski says.
Those risks are the market, inflation, health care, longevity and withdrawal.
“If some of your money isn’t positioned to keep up with the rising cost of goods, services and health care, then your standard of living may be different,” Zielinski says.
Keeping a diverse investment portfolio in retirement can help offset those concerns. Bryan Bibbo, financial advisor and accredited investment fiduciary at Avon’s JL Smith Group, offers the bottom line on continuing to invest.
“[During retirement], there’s no more money going into the pot of what you need to live off of,” he says.
Facing the Factors
A sound financial plan is a road map that will guide you to the goals you want to achieve. Your first task, Zielinski says, is to fully understand your budget. That means identifying needs, wants and wishes.
“Update your budget as you progress through retirement and as your spending habits shift,” she says.
Some of Zielinski’s clients choose to spend more in early retirement, perhaps traveling or buying the boat they always wanted.
“Then, they throttle it back once they hit a certain age,” she says.
But most importantly, your financial plan should help you mitigate the financial risks individuals face during retirement.
Any time you bet on the market, there’s risk. Remember 2008?
“You could have had an $800,000 nest egg and lost 30% of your wealth upfront,” Zielinski says. “That market risk is huge, and it will impact what your retirement looks like.”
Technically, this is referred to as “sequence of returns.” The market goes through ups and downs, and if all your investments are sitting in the market and a Black Friday strips your wealth, it generally takes about three years for the market to shift back to even.
This is why your dollars should be tucked away in a savings account you can access, stocks that inevitably ride with the market and stable investments like mutual funds.
While it’s funny to think that a house in 1970 costs about what a new car does today, inflation, another key risk, is no joke.
“We can’t control inflation risk, and as we age, our expenses shift to higher-inflation items like health care and housing rather than clothes and food,” Zielinski says.
Generally, the inflation rate is 2.5% to 3% per year.
Avoid having too much money in cash-equivalent investments like money market funds or treasury bills because inflation could outpace you. Keep in mind, over the last decade, Social Security typically has not kept up with inflation, and most pensions are fixed and do not have a cost-of-living
adjustment.
“Set up investments to help your money keep up with inflation,” Zielinski says.
And health care costs are actually higher than the average inflation rate — an average increase of 5.3% per year.
“Which is a bigger piece of the overall budget,” Zielinski says.
Be prepared to face those higher costs as you age, and work with your financial planner to build that growing expense into your plan.
Take into account the fact that advances in health care, pharmaceuticals and lifestyle changes are causing the population to live longer. Plan optimistically so you don’t run out when you have years ahead.
“As the average life expectancy increases, you need a financial plan that will push you out into your 90s, if you want to consider how to invest and spend during retirement,” Zielinski says.
Work in Buckets
With so many risks out of your control (market, inflation, health care and longevity), smarter withdrawing is the one place you’re in the driver’s seat.
“This is the one thing you can control,” Zielinski says. “Withdrawing too much or taking money from the wrong account at the wrong time can be detrimental.”
That’s where a bucket list (no, not that bucket list) comes in, answering the question What account should I pull money from first?
Bibbo recommends first addressing your risk tolerance and whether it’s best to be conservative as you age and live out your
retirement.
It’s not entirely necessary to rein in your wild side. Risk tolerance is based on your investment goals and experience, how much time you have to invest, your other financial resources and your personality.
Basically, are you the type of person who will stay up worrying all night about an investment, or can you handle some market ups and downs without stressing?
“I have an 80-year-old client who says, ‘I’ve been risky my whole life and I’ll continue to be — I don’t care,’ ” Bibbo says. “But she has social security and a pension coming in, so she doesn’t have to worry about monthly income.”
Ideally, you should adjust your risk profile based on the bucket of money those funds will sit in. Bibbo recommends having three “buckets”: Now, Soon and Later.
Your Now Bucket is essentially a standard savings account through your bank that holds cash that can be readily available for planned expenses such as buying a new car or replacing your roof.
“The last thing you want to do is use investments to pay off credit card bills,” Bibbo says. “Keep money in the bank for planned expenses and keep a buffer of about 3 to 6 months of income in the bank so you feel comfortable.”
