Making the money last when it's time to shift from saving to spending
You’ve earned and saved money and now you’re headed into retirement. What could go wrong? Along with a new schedule and opportunities come new questions and challenges, particularly around finances. The most pressing ones are often: “Do I have enough savings to last my lifetime?” and “How do I turn my nest egg into a paycheck that I can count on throughout retirement?”
One of the biggest changes in retirement is going from receiving a consistent paycheck to needing to generate your own cash flow to cover expenses. This shift requires a new investment strategy and mindset.
The 3 Phases of Retirement
To start, you’ll want to think of retirement as a series of three unique stages:
The “Go Go” Years In the first years of retirement, you’ll likely be focused on the fun things in life, such as travel or enjoying activities with friends and family. The result can be a spike in lifestyle expenses. During this period, your investment strategy should account for a faster withdrawal rate from your portfolio and more money going out the door.
The “Slow Go” Years Throughout these years, it’s likely you’ll settle into a routine. Your desire to be as active may taper off, and with it, life expenses can tend to go down.
The “No Go” Years More Americans are living into their 90s or beyond. While this is a testament to our medical advancements, increased longevity is often accompanied by physical limitations. At this point in life, you may scale back your activity even more and find that your remaining expenses are focused on daily living and possibly health care-related.
5 Ways to Restructure Your Portfolio for Retirement
Throughout the different phases of retirement, you’ll need to develop strategies around covering your day-to-day expenses as well as the best ways to tap into your assets. Both strategies should meet your goals and reflect your views on risk. Regardless of your circumstances, be sure to address five key areas when mapping out your retirement income plan:
1. Protect against sequence risk If the stock market takes a tumble and you’re not appropriately diversified, you could be forced to pull money out of investments that have declined precipitously. The returns during the first few years of retirement can have an especially significant impact on your long-term wealth picture — this is known as “sequence risk.”
So consider keeping some of your money in liquid investments such as cash or other relatively safe, short-term vehicles to cover expenses for the first two or three years of retirement.
2. Match your assets to your expenses Identify which of your expenses are required to meet your basic needs of living, (such as food, shelter, utilities and health care) and which are discretionary (like travel and hobbies). Then, target sources of guaranteed or stable income to meet your essential expenses. This can include Social Security, a pension if you’ll get one and perhaps an annuity with guaranteed payments.
You can use investments that may vary in value to meet your discretionary expenses.
3. Remember that taxes are an ongoing expense As you create your own paycheck in retirement from your savings; remember that you may still have a tax liability. Unlike your working years, taxes may not be automatically withheld from your sources of cash flow. Even the majority of Social Security recipients are subject to tax on the benefits they receive.
Depending on how effectively you manage your income level, you may qualify for a zero percent long-term capital gains tax rate when liquidating certain investments in a taxable account.
Working with a financial professional before, and throughout, retirement can help you calculate how much you may owe in taxes or which tax breaks you may be eligible to receive.
4. Pay attention to required distribution rules for your retirement accounts If you have money in traditional Individual Retirement Accounts (IRAs) or workplace retirement plans, remember to comply with the government’s required minimum distribution (RMD) rules.
After age 70 1/2, you must take withdrawals from these accounts annually — even if you don’t need the money — based on a schedule provided by the Internal Revenue Service. Failure to comply can result in a significant tax penalty. (Money held in Roth IRAs is not subject to RMD rules).
5. Keep in mind that growth is still a concern When you are younger and accumulating wealth, your primary investment focus is growing your assets. However, in retirement you need to think about the potential impact that inflation could have on your future income needs.
To keep pace with rising living costs, you will still need to grow your assets. That may mean keeping a portion of your portfolio invested in equities that historically have outpaced inflation, but could also be subject to more market volatility.
Start planning early to protect what you’ve accumulated and position your assets for their new purpose — to generate income to last throughout your retirement.
Investors have two major ways to find new investments that are the top-down approach and the bottom-up approach.
From where I stand, both methods have their merit. In fact, the goal of each approach should be the same thing, that is, to find good investments in the vast world of stocks. But, at the same time, these two approaches are quite different.
With that in mind, let’s take a look at the key differences between these two strategies.
The top-down approach
Investors who use the top-down approach tend to take a broad view before focusing on a particular sector to find suitable investments. For instance, recent reports suggest that interest rates might increase soon. With that framework, top-down investors may look at industries that can benefit from interest rate hikes, as such the financial industry.
The focus then shifts towards companies that operate within the financial industry. This method allows investors to concentrate on growing industries, or companies that are primed to benefit from any macroeconomic changes.
In my opinion, the key advantage of the top-down approach is that investors can focus their energy and time on specific industries. That would be mean less time is wasted casting their net too widely.
On the flipside, investors who use this approach limit may themselves to certain industries, and may miss out on other investment opportunities. As a result, there may be investment gems that are missed out.
The bottom-up approach
In contrast, the bottom-up approach involves making investment decisions based on the individual attributes of a company. Here, investors will tend to overlook the broader economy and focus on companies that they think have strong fundamental characteristics.
To sieve out good companies, they avoid industry-specific screening but will be open to any company that meets their investment criteria.
The key advantage of this method is that investors can find good investments, regardless of the industry that it operates in.
However, as you might have guessed, the bottom-up approach can sometimes be taxing and time-consuming as investors might have sieve through a large number of companies to find the few that are worth investing in.
A Foolish takeaway
Whether it is top-down or bottom-up, both methods have its pros and cons. As investors, we might want to consider employing the stock screening approach that suits our investment style. After all, the investor’s goal is to find the investments that can earn good returns in the stock market.
Here are few tips to make a comprehensive and successful investment plan that can lead you towards a profitable investment future in share market. Get more stock trading tips from India Infoline.
Many investors think the stock market is like a treasure box. Once you open it, it would overflow with wealth and goodness. However, that’s not the case. The stock market does have the potential to make you rich but only if you invest smartly. You need to plan your investments in such a way that your losses are lesser than the profits in the long run.
For this, you need to have an investment strategy in place. If you are a new investor investing in the stock market for the first time, you need to consider some points. These would help you make a comprehensive and successful investment plan. Implementing and following these tips can lead you towards a profitable investment future. So here are 5 tips for your consideration:
1. Spend time in preparation before you start
Investing in thestock market isn’t something you start immediately once you hear about it. Take time to understand and prepare yourself for the stock market. Know the various risks associated and your reasons for investing. Having clarity about your reasons helps you get focused results faster.
2. Know your investment options
As a new investor, you have an option to invest in different shares individually or invest in mutual funds and let the fund manager do the work for you. Ensure that you know the various options that stock market has to offer. Consider each along with its pros and cons. Weigh it with the goal and reason of investing and see if it is the most profitable option for you. Investment in stocks, gold, real estate and other avenues are some of the many options that you must consider. Once you choose, ensure you stick to it till you achieve your goals.
3. Have a roadmap and diversify investments
In the stock market, just investment is not enough. You need to have a solid financial plan or roadmap to back your investments. Consider your financial situation, your cash flow and risk tolerance before investing and locking away your funds. This would ensure that you are able to manage comfortably without having to be dependent on anyone even in the event of a loss. Planning also helps you make a budget and promote financial discipline in your life.
4. Have a contingency plan in place
Since investment in thestock market may not be completely safe, it is always advised to have a contingency plan in place. This is often referred to as an emergency fund. It is something that you keep contributing to, along with your investment. The role of this fund is to take care of you in case an emergency arises. You don’t have to withdraw from your investment in that case but instead can meet your urgent need with these funds. Ideally, having a sum that could last you for six months without any other income is considered as a basic level of an emergency fund.
5. Avail professional help, if necessary
You are a first-time investor and therefore, it is quite possible that you would not be well aware of the nuances of the market. At such times, you can take help from a professional investment advisor. An investment advisor or financial planner would help you identify and analyze your goals and work towards it. They would also provide you with a roadmap for your investments and also factor in your emergency fund for your financial security. You can ride on their market knowledge and expertise till you are confident of taking care of your investments on your own. They might charge a nominal fee for this service but the upside or learnings you get, besides the profits, are priceless.
As a new investor, you don’t need to get afraid when investing in the stock market. Spend time in knowing why you want to invest and what is it that you want to accomplish out of it. This would help make half of your task easier. Then check out the various options, choose the ones that suit you and plan your investment strategy for a happy future. If you still have doubts, don’t shy away from taking professional help. It would only do well for you and your investments. So, stop delaying and start investing today.