Many people work hard to build retirement savings and, as such, want to use that money to enjoy their senior years to the fullest. But you might have different plans for your nest egg.
For you, leaving wealth behind to your children and grandchildren may be your top priority. If so, you may decide that you're going to aim for an interest-only retirement.
An interest-only retirement has you investing your savings in interest-bearing assets, like bonds. From there, you pledge to leave your principal balance alone and instead live only on your interest income.
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Here's how this might work in theory. Let's say you retire with a $2 million nest egg. If you put it into bonds paying 4%, you get $80,000 a year to cover your expenses, all the while leaving the original $2 million alone.
If you come into your senior years with a large enough savings balance, an interest-only retirement may be doable. This especially holds true if you're in line for a fairly generous monthly benefit from Social Security. Plus, you may have access to additional income sources, like earnings from a part-time job. But while an interest-only retirement might seem doable, you could hit some snags.
Will your assets pay enough for you to avoid touching your principal?
In the course of planning for an interest-only retirement, you might assume that your portfolio will be able to continuously generate a certain amount of interest each year. But in reality, nobody knows what the future holds.
In theory, it's very possible that you'll be able to snag a 4% interest rate on a portfolio over several decades. But if interest rates drop, you may be forced to touch your principal at some point to cover your costs.
Unplanned expenses could get in the way
It's easy to set up a retirement budget based on the amount of interest income you expect to receive. But if large expenses pop up, you may have to tap your principal to cover them.
Let's say you end up needing to make a $20,000 home repair one month. If you're trying to live on $80,000 a year plus some Social Security, that may not be enough to cover a job that costly. So in that scenario, raiding your principal may be necessary.
RMDs could get in your way
If you truly want to attain an interest-only retirement, you may want to keep your nest egg in a Roth IRA or 401(k). If you stick to a traditional retirement plan, you'll be looking at required minimum distributions, or RMDs, at a certain point.
Now just because RMDs force you to withdraw from your principal balance doesn't mean they force you to spend that money. So you could always turn to a taxable brokerage account and reinvest those funds. But it's important to be mindful of RMDs if an interest-only retirement is a goal of yours.
An interest-only retirement is something that may be attainable. But it might also cause you stress. Either way, if you're going to try to pull it off, know that you'll need to go in with a reasonably robust savings balance. Otherwise, you might force yourself into a needlessly cash-strapped existence if you decide that your principal is truly off-limits.
