If you’re at or near retirement age, you’ve likely become accustomed to the ups and downs of saving and investing.
You’ve saved and splurged and saved again. And you’ve no doubt watched your retirement accounts grow and shrink a few times over the years.
You’ve learned to stay calm and stay the course.
But with retirement looming and so many decisions to be made, everything seems to get more complicated. The options for saving and investing keep increasing, and dealing with your money suddenly can become overwhelming and scary.
But if you stick to the basics, it doesn’t have to be. Just think of your retirement money as being divided into three different worlds:
- Emergency Fund: This is what your mom used to refer to as a “rainy-day fund.” There’s less risk associated with this money, and it should be easy to access. It isn’t for your everyday expenses, though; it’s there to act as a safety net, to be used when you need it for a new car, a leaky roof or some other unexpected obligation.
- Income: You’ll use this money to cover your month-to-month expenses in retirement. It includes your Social Security benefits, your pension (if you have one) and any other tools you decide to use — fixed annuities, dividend-paying stocks, real estate investment trusts or other alternative financial vehicles.
Keep in mind that, over time, the amount of income you pay yourself will be affected by taxes and inflation, so plan accordingly. If you decide you’ll need $5,000 net each month, for example, you may want to plan for $6,000 in income. Your income world won’t be as protected as your emergency fund world, but it should have limited volatility, because this is the money you’ll need to live on — for the rest of your life — once your paychecks stop.
- Growth: This is the money you’ll keep in the market long-term and with a bit more risk attached. How much you put here will depend on various factors, including your ability to handle a loss.
It’s tempting to stash everything in growth when the market is doing so well, but if there’s a nasty downturn, it could affect your portfolio. You don’t want to be forced to sell at a low point to maintain your income. The old saying that it’s about time in the market, not timing the market, holds true here.
The challenge, of course, is in deciding the proper amounts to devote to each of these three worlds. The mix will be different for each individual, so it’s important to strike the appropriate balance that meets your individual needs.
Let’s say you have $1 million. You may decide to put $100,000 toward your emergency fund and $500,000 toward income. That leaves $400,000 for growth.
You’ll have your emergency fund and your income set — so you can take a little more risk with your growth money and hopefully not disrupt your plan. You hope you won’t land in a position where you have to sell if you don’t want to. It’s meant for the long term.
So many people come to our office for the first time with a plan that leans one way or the other. For some, it’s way too conservative and all their money is in safe cash accounts. For others, it’s way too aggressively invested in stocks for someone close to retirement.
That’s why it’s important to work with the right financial professional — someone who has the tools and ability to help you build a plan with the proper strategies that can help you feel confident in your financial strategy.
Segmenting your assets in this way will help you work toward your retirement goals with fewer complications and a lot less stress.
Kim Franke-Folstad contributed to this article.
Photo: Lending Memo