These days, millions of people are so insecure about being able to make ends meet after they retire that they're seriously considering giving up on retirement entirely. But if you've done at least a good enough job to give yourself a sporting chance of having your nest egg last throughout your retired years, then some smart money management can make a huge difference in your standard of living.
The challenges of retiring
No one said it's easy to retire. In one fell swoop, you'll lose a big paycheck and face the need to make your savings last a lifetime. But even in this tough environment, you can take a few steps to put yourself in the best position to succeed. Let's take a look at three ideas:
1. Get your cash ready.
The worst thing in the world is to have to sell stocks at exactly the wrong time. As Sheryl Garrett of the Garrett Planning Network told The Wall Street Journal recently, one of the toughest obstacles to overcome right after you retire is a down market that lasts for several years. As Garrett put it, "If you retire when the market goes up for a few years, you're going to be sitting pretty. ... But if you have a few bad years in a row, you're in trouble."
The best way to avoid the impact of those bad years is to have a substantial amount of cash built up before you retire. That way, if you get those bad years early on in your retirement, then you can still afford to wait until a recovery comes before replenishing your cash coffers by selling off investments. But during normal times, you can maintain your normal strategy to take advantage of strong periods for the financial markets and keep your savings levels high.
2. Get investments that will pay you well.
With 10-year bonds paying around 2% and most bank CDs paying less than that, you can't afford to sit back and play defense with your income portfolio. But you also don't want to get too aggressive by shooting for the moon with risky stocks. And that risk takes different forms: For instance, high-yielding dividend stocks can be just as risky as expensive high-growth stocks under certain conditions -- especially when investors are reaching for yield.
The right middle ground could be to look for cheap stocks that produce reasonable if not excessive dividends. For instance, Marathon Petroleum (NYSE: MPC), Abbott Labs (NYSE: ABT), and McDonald's (NYSE: MCD) make an eclectic mix, but they combine three favorable traits: They give you diversification while also providing decent dividend income at inexpensive valuations. With the threat of a new bear market coming, that protection won't save you from losses entirely -- but it can help you cushion any future blow.
3. Sell the right stocks.
Even with relatively safe dividend stocks, most retirees won't be able to generate enough income from their portfolios without selling off some of their assets occasionally. For instance, even the high-yield ETF Vanguard High Dividend Yield ETF yields only 3.3% right now. But the right sell discipline can make a huge amount of difference.
Often, the thing people are least willing to do is to sell highfliers while they're still flying high. For instance, Chipotle (NYSE: CMG) has performed very well lately and has avoided many of the losses that other popular high-P/E stocks such as salesforce.com (NYSE: CRM), Green Mountain Coffee Roasters (Nasdaq: GMCR), and Netflix (Nasdaq: NFLX) have suffered recently. Many conservative investors prefer to dump stocks that have already fallen, expecting their winners to keep bucking the trend and rising.
In order to buy low and sell high, though, you have to be willing to follow the rule and sell high. Sure, you'll sometimes miss out on the blockbuster growth that early sellers in Chipotle, Salesforce, Netflix, and Green Mountain missed out on. But even if you don't grab the exact top, you'll still lock in some gains -- and more often than not, you won't need to sell all your shares, keeping a stake in a company's future growth for years to come.
Go ahead and get ready to retire
Convincing yourself that you need to work the rest of your life is a sad fate. With just a few simple adjustments to your finances, you may turn pessimism to success.
Once you're convinced you can retire, get on the path to do it the best way you can. The Fool's newest free special report, "The Shocking Can't-Miss Truth About Your Retirement," can show you the way.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.
