Retiring Early? Tips for Making Your Money Last a Lifetime
You have spent your entire working life building up your asset base and saving as much money as you could. Through hard work, dedication and the ability to delay gratification, you have created a nest egg you believe can sustain you throughout a long and happy retirement. Early retirement has always been your dream, and now you are ready to start living that dream.
If you are getting ready to pack it in early and kiss the work world goodbye, you now need to shift your focus from saving money to spending it. Making your money last in retirement can be just as challenging as building that nest egg in the first place.
Set a Realistic Retirement Budget
If you were able to save enough to retire early, you are probably already good at living below your means. Chances are you already have a monthly budget in place, but you may need to tweak it for life after work. If you have not need to tweak it for life after work. If you have not already done so, now isthe perfect time to look at not only how much you are spending now but how much you expense to spend after you retire.
The tab for your monthly essentials probably will not change very much. You will still need to keep the lights on, pay your property taxes and heat your home. If you plan to sell your current home and move to a smaller one, be to sell your current home and move to a smaller one, be sure to factor those lower living expenses into your retirement budget. Otherwise, you can leave those basic costs unchanged.
If you are ready to retire, you probably have already researched the cost of individual health insurance. Health insurance coverage is often one of the largest expenses early retirees face, so you will need to factor that cost into your new monthly budget. Be sure to include other out-of-pocket costs as well, including deductibles and copayments.
Assessing Your Net Worth
Getting a realistic picture of your net worth is just as important as creating an accurate retirement budget. Knowing how much you expect to spend is only part of the equation. Even more important is knowing where that money will be coming from. If you have not already done so, create a spreadsheet that details all of your holdings, from the 401(k) at your soon to be former job to your IRA and outside investments. If you are younger than 59IA, your analysis should separate out retirement accounts and non-retirement money. You may not be able to tap those retirement funds until you reach that age, so you may need to rely more heavily on outside investments during the early years of your retirement.
You will also need to look at your asset allocation and decide how much you should have in stocks and how much should be in lower yielding but more stable investments. Every investor is different, but a 60/40 allocation of stocks to fixed income is often recommended.
One strategy is to tilt your retirement funds more toward stocks and keep more cash and fixed income investments in your personal investments. That strategy can be particularly effective if you are too young to start drawing from those 401(k) and IRA plans. Leaving those investments in the stock market gives them time to grow while still allowing you to use your other investments for current living expenses.
If you are going to use this strategy, you might want to consider putting 5–7 years’ worth of living expenses into a variety of safe and stable investments. Money market funds and certificates of deposit are both good choices. Having that much cash set aside can give you the money you need to meet your daily expenses. That eliminates the risk that you will have to draw money out of stocks during a period of weakness.
The 5–7year time horizon should give you plenty of time to ride out any bear markets that do take place during the early years of your retirement. If the stock market has a particularly good year, you can book some of those profits and use them to replenish the cash portion of your portfolio.
It is important to remain flexible throughout your entire retirement, but that flexibility is particularly vital during the first couple of years. If you withdraw too much during these critical years, you greatly increase your odds of running out of money later on. Monitoring your spending of running out of money later on. Monitoring your spending and adjusting your budget can help you make the most of your money in the early years and make that nest egg stretch as far as possible.
You are probably already familiar with the 4 percent withdrawal rule, which allows you to take out 4 percent of your original nest egg in year one and adjust withdrawals for inflation after that. That rule is a good one, but it should be more of a guideline. If our investments have a particularly good year, you may be able to pull out more than 4 percent. When stocks fall and your investments do poorly, you may need to drop your withdrawal rate to 3 percent or even less. Leaming to budget and put aside some extra money during the good years will help you weatherthose financial storms and keep your early retirement on track.
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