Source: Flickr user Jimmy Harris.
Financial markets are, unfortunately, totally unpredictable. While your retirement savings could be growing rapidly in one decade, they could easily fall or stagnate in the next. On top of all the other worries you might face as a retiree, do you really want the added stress of wondering how much you can withdraw from your account next year or whether you'll run out of money in the coming decades?
Creating retirement peace of mind starts by taking these four steps, which will insulate you from some of the swings of the market and build some predictability into your life.
Build a stable income base
As a retiree, you have a choice: You can rely on a fluctuating asset base like retirement savings as your main source of income, or you can build some stability with a consistent income stream.
Having a stable income that you can rely on will take a lot of the stress out of the equation. You won't have to worry about what the market is doing or whether you're withdrawing too much this year.
How do you do it? You might already have a pension, property rental income, Social Security, or another steady source of funds. Or you can divert some of your retirement savings to a fixed annuity, which provides a guaranteed income stream for life. Wherever it comes from, the key is to find a way to rely primarily on an income source (or sources) that won't fluctuate along with the market and will provide you with enough cash to cover your basic costs.
Make sure you have liquid assets
Having liquid assets that you can dip into if something comes up will also insulate you from the market. Think about how stressful it would be if you suddenly needed a lot of capital right when the market dropped. While you won't make any breathtaking returns on your liquid fund, it will give you peace of mind to know that it's there and easily accessible if you need it.
How much you actually want to keep in cash (or equivalents) can depend on your personal risk tolerance and situation, but if your typical "emergency fund" guidance is a few months' worth of living expenses, consider extending that to a year or two. You might even want to go further out if you really want to ensure that you'll be OK no matter what happens in your IRA or 401(k).
How you build this base is up to you. Have you considered downsizing your home? Selling other unnecessary assets? Liquidating some investments? Put the cash together and, most importantly, leave it there -- eventually it will come in handy.
Be flexible about drawing down your retirement accounts
Once you have a stable income base and a savings account, the vagaries of the market will become a lot less stressful. That said, you do need to take market fluctuations into account by adjusting how much you withdraw from your nest egg each year.
For example, popular rules of thumb, such as the oft-cited 4% withdrawal rule idea, have simply not lived up the claims of being universally applicable or even reasonably conservative. In fact, recent research has found that given the current market environment and a portfolio allocated 40% to equities and 60% to bonds, you'd have more than a 50% chance of running out of money in 30 years if you rely on this rule.
If you have a stable income source, you can solve this problem by building flexibility into your withdrawal rate. Instead of 4%, consider withdrawing just 2% when your portfolio has done poorly. Better yet, think about instituting a rule that says you can take 75% of what your portfolio returned in the previous year. In good years, you can use the extra money to pad your savings and go on a great trip, and in bad years you can still be free of worries about sudden car repairs or other expenses.
While it won't be as generous or as simple as "4% per year," basing your withdrawals on your earnings will help to ensure that your savings can last throughout your lifetime.
Be conservative about health care expenses
Need another reason to be flexible about retirement account withdrawals? It's no one's favorite subject, but keep in mind that the older you get, the more money you might need for medical care. Unfortunately, health care costs are unpredictable, they vary widely from person to person, and they're rising no matter what you're spending now.
To give you an idea of how much these expenses can vary, consider that in 2010 someone in the 25th percentile of spending shelled out an average of about $2,000 per year on health care. A person in the 90th percentile spent nearly $6,000. Accounting for inflationary pressures, one researcher estimated that in 2040, a person in the 25th percentile will spend $5,000 per year, while the 90th percentile person will spend just under $14,000.
How do you prepare yourself for the unpredictable? It goes back, once again, to the first three tips: Build an income stream you can live off of, be conservative about stashing away the rest, and minimize distributions from your retirement account.
If you find that you're 90 and in peak form, you'll still have the money to go snorkeling in Thailand. But if, on the other hand, you're 90 and in need of extra nursing help, you'll also be happy to have the money and the peace of mind of knowing you can afford it.
