By Joe Arnold, AIF®
All retirees want the confidence that comes with knowing their retirement funds will last a lifetime. With 56% of Americans worried about running out of money in retirement, (1) it’s more important than ever to make sure you are prepared. While there is no quick-fix guarantee that you will never run out of money, there are certain steps you can take to help maintain your wealth and improve your financial security. Instead of worrying about running out of money in retirement, use these 3 steps to make your money last a lifetime.
Diversify Your Income
A great way to make your retirement funds last is to diversify your income. The truth is, no matter what your net worth, your income is one of your best wealth-building tools. That’s why a solid income stream is great, but multiple streams of income are even better.
Diversified income streams act in much the same way that diversified investments do. They allow for less demand and stress on any one income source, so that if an unforeseen event were to occur, the remaining income streams can pick up the slack. There are many ways to diversify your income, including:
- Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You will earn less than what you’re making now, but all of these options will provide flexibility and a form of income diversification that will keep your retirement savings intact for longer.
- Use dividend-paying stocks. Dividend-paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth.
- Risks. Diversification and asset allocation strategies do not assure profit or protect against loss. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Please be sure to speak to a financial professional regarding your specific situation prior to making any financial decisions.
Avoid Overspending & Invest for Growth
Do you know what you will do with your newfound freedom in retirement? Many people start by pursuing all the things they didn’t get to do while working—traveling the world, picking up a new hobby, remodeling their home, and the list goes on.
But many people underestimate the amount of money they’ll spend in those first few years of retirement. With so much extra time on your hands, it’s easy to make a lot of little purchases that add up over time. Avoid overspending by creating a detailed (but realistic) budget for your retirement years. You can budget for extra expenses like a vacation or pursuing a new hobby, but make sure you know how it will affect your nest egg before you follow through.
In addition to avoiding overspending, another strategy for making your retirement income last is to invest excess cash for growth (stocks) instead of fixed income (bonds). This may sound counterintuitive since retirees tend to invest in more conservative investments to maintain a steady income. But as bond yields remain historically low and inflation reaches new highs, many experts have expressed concerns over the sustainability of retirement investments that have a larger allocation toward bonds.
You certainly need the fixed income component, but it’s important to consider including investments that have a greater growth potential in order to keep up with inflation and maintain your ability to withdraw funds every year.
Create a Withdrawal Strategy
When it comes to withdrawing from your retirement accounts, how you take your distributions can make all the difference. Your retirement income sources are likely produced from a variety of assets, including employer-sponsored retirement plans, Social Security, personal IRAs, or other income-generating investments. Each asset has different tax characteristics, and properly structured investments can help lower your tax burden if you plan how and when you’ll withdraw from each.
For example, most people will receive Social Security benefits during retirement, but 85% of your Social Security income can be taxed at your regular tax rate if your income exceeds a certain amount. (2)
Regarding your personal savings, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. Creating a withdrawal strategy and a tax plan can help you maximize your retirement funds and improve financial security.
Need Help Making Your Money Last?
There’s no single answer to when you can retire or how much money you need to live a comfortable life, but there are concrete ways to improve your financial security. At Foundation Wealth Advisors, we’re here to help. If you’d like to learn more about how to secure your money through retirement, we would love to hear from you! Schedule a complimentary appointment by calling (440) 899-7535 or emailing me at jarnold@foundationwa.com.
About Joe
Joe Arnold is an independent financial advisor and the founder and president of Foundation Wealth Advisors, LLC, an independent firm whose advisors provide private investment management for individuals and families, as well as retirement plan consulting for small and mid-sized businesses. With over 20 years of experience in the financial industry, Joe specializes in providing objective advice to individuals, as well as transparency in building and managing company 401(k) retirement plans. He is committed to putting his clients’ best interests first in all decision-making and recommendations. Based in Westlake, Ohio, he serves clients in the Cleveland, Akron, and surrounding areas, as well as throughout the country. Joe received a bachelor’s degree in business administration from Cleveland State University and is an Accredited Investment Fiduciary® (AIF®) professional. He has been featured on national television, including CNBC and FOX Business, and quoted in various publications, including The Wall Street Journal, CNN Money, Forbes, and others. Joe lives in Rocky River, Ohio, with his wife, Allison, and their two grown children, Kevin and Keira. An avid golfer, he is a former Class A PGA of America teaching professional and NCAA Division 1 athlete. When he’s not working, he enjoys playing golf, reading, and honing his culinary skills. To learn more about Joe, connect with him on LinkedIn.
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(1) https://www.nirsonline.org/wp-content/uploads/2021/02/FINAL-Retirement-Insecurity-2021-.pdf
(2) https://www.ssa.gov/benefits/retirement/planner/taxes.htm