Let’s say that your retirement is now around the corner. You’ve heard theories on what you should do in retirement. You have saved and saved and now … You have to make a change and start spending.
Dick Van Dyke has been quoted as saying, “I found out retirement means playing golf, or I don’t know what it means. But to me, retirement means doing what you have fun doing.”
This is a mindset shift that may be helpful for those who are uncertain about the future. As you focus on retirement, think about retiring to something, not retiring from something.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Many people do the right thing by planning for their retirement well ahead of time. But when they think of having to start using their retirement money, nagging questions persist because there are some uncertainties in retirement, such as inflation, tax rates, market volatility and health issues. Am I going to have enough money to retire? Am I going to outlive my assets?
Whenever you start considering those questions, it makes sense to start making a plan. I suggest that you put together three different baskets for your retirement money.
1. Cash basket
This basket is for short-term needs — for the unplanned expenses, which often feel like they hit at the worst times. At a minimum, it’s prudent to have three to six months of living expenses available in case of emergencies, such as car repairs, a broken appliance, leaky roof, etc.
Building a sizable cash basket or emergency fund well before retirement is a must, allowing you to handle these bad breaks without dipping into retirement savings or taking out loans. Maintaining an emergency fund in retirement is just as important.
One vehicle you can use as a cash basket is a savings account. Ideally, this account would be linked to your checking account. The money should be kept safe and liquid so it is readily available, and it should be tapped only for true emergencies.
Get in the habit of replenishing the account if you draw on the funds. You can also utilize a certificate of deposit (CD). You will incur penalties for taking the money out before the CD matures, but the penalty will not take away from the principal amount deposited. You will receive a much better interest rate and usually come out on top even if you do need to take the funds out early.
2. Income basket
With people generally living longer, you’re possibly going to have at least 15 to 20 years of retirement. The income basket is where you want to have guaranteed, stable income when you’re no longer drawing a paycheck. It is important to have clear goals in place when setting up your income basket. I had grandparents who retired and traveled the world. I also had a grandparent who worked part-time to get out of the house. Your plan will look very different if you are going to travel or engage in other activities that are greatly affected by inflation.
If you want to participate in activities where costs are volatile, you are going to need to look at income options that will give you more flexibility. For example, you may want to consider a bond mutual fund portfolio, short-term government bonds and variable annuities.
If you are planning on spending your retirement on things that are more controlled with lower costs, you can utilize income options with less flexibility. For example, you may want to consider long-term government bonds, high-grade bonds and fixed annuities.
It is important to have a runway in the income bucket of six to 10 years, thus allowing time for the growth bucket to recover in the event of an extended bear market.
3. Growth basket
Once you have figured out what you are going to need to live out your retirement, you can focus on getting a higher rate of return on the remaining funds. When you know your income is taken care of, you can afford to take a risk with some assets. For example, you may want to consider investing in individual stocks, equity/stock mutual funds and international investments. The key to success in the stock market is not selling when things start to drop. Knowing your income is secure makes it easier to stay invested and allows for your growth basket to recover.
Retirement means doing what you have fun doing. That’s hard to do if you’re frequently worried about having enough money. For many people, that’s their biggest retirement concern. Like the old saying goes, don’t put all your eggs in one basket. Actively planning and proportioning money in these three baskets can help alleviate those financial concerns.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Related Content
- Five Things I Wish I’d Known Before I Retired
- Retirees’ Anti-Bucket List: 10 Experiences You Don’t Want
- Do You Have at Least $1 Million in Tax-Deferred Investments?
- The Four Headwinds of Retirement and How to Combat Them
- To Create a Happy Retirement, Start With the Three Ps
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial PlansFinancial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around YouWhile thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.
