Retirement should be about exploring items on your bucket list, not worrying about your finances. But for many, it’s overshadowed by the looming question: “Will my money last?” In fact, an alarming 56% of Americans are concerned that their savings will run out in their later years.
Today’s savers are navigating a financial landscape that is different from previous generations. For starters, we are living longer which means your money will need to last longer — potentially well into your nineties. But even in our earning years saving for retirement can be difficult, with student debt, housing prices and increasing costs for everything from groceries to gas to medical expenses.
The dream, of course, is a retirement fund that keeps pace with your life — a financial cushion that lets you live in freedom, not fear. While there’s no magic formula to making money last a lifetime, integrating investments, saving, and meticulous planning into your financial strategy can make a world of difference.
So how can you have the retirement you’ve always wanted? In this article we’ll explore three actionable steps that anyone can take towards financial freedom — whether you’re starting now or are an experienced saver.
It’s time to do more
Will your money last a lifetime? One way to make your nest egg go the distance is to diversify your income streams. While your income will always be your greatest tool for building wealth, having multiple sources of income is even more advantageous.
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Diversified income streams operate much like a well-balanced investment portfolio. They reduce the dependency on any single income source, providing a safety net in case of unexpected events. How can you make this happen? Here are some options:
- Automatic additions to retirement accounts. By making automatic additions to an IRA, 401K, or brokerage account, you will be building a retirement fund you can live on in retirement. Those accounts can be invested in a mix of dividend paying stocks, interest-paying bonds, or other investments that will grow over time.
- Invest in real estate. Owning rental property is a great way to earn passive income in retirement. You may have to take on mortgage debt to own a property, which will increase your expenses now. However, if you can earn enough rental income to pay the debt down, you can be in a great position in retirement.
- Active income. Continuing to earn active income will provide some flexibility and diversify your income streams. You can turn a passion into a consulting business, freelance or work with nonprofit organizations. Even working part-time will give you a little extra cash for your savings.
Another great way to make your money last is to avoid overspending. Many people underestimate the amount of money they will need in retirement, particularly in the first few years. With more time to do the things you want; the little things add up. Factor in major expenses like traveling and remodeling your home, and suddenly you’ve overspent your savings.
Alongside cautious spending, consider a growth-oriented investment approach. Usually, retirees opt for safer, fixed-income assets like bonds. However, stock or other growth-oriented investments may perform better than bonds over the long haul. Although fixed-income assets are essential, incorporating investments with substantial growth potential can help you combat inflation and secure your annual withdrawals.
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Finally, crafting a smart withdrawal plan can maximize your retirement funds and improve your financial situation. When it’s time to tap into those retirement accounts, the how and when are critical. Your retirement income likely comprises various assets — from 401(k)s to Social Security and personal IRAs. Each comes with its own tax rules and a well-thought-out plan can minimize your tax burden as you strategically withdraw funds.
For instance, you might be relying on Social Security benefits but remember, up to 85% of that could be taxed if you exceed specific income levels. The tax impact of pulling $50,000 from a Roth IRA is different from doing the same with a traditional IRA. A hasty withdrawal can set off a tax domino effect, affecting your Social Security, capital gains and even hiking your Medicare premiums. However, a planned tax and withdrawal strategy can help your retirement dollars stretch further.
Getting help along the way
Navigating the complexities of financial planning for pre-retirees isn’t just about having enough savings, it’s about intelligent diversification, budgeting with a purpose and creating a tax-savvy withdrawal game plan. By taking these proactive steps, you’re not just making your money last a lifetime but investing in a peace of mind for enjoying your golden years to the fullest.
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