Congratulations, you have reached a big turning point in your life. During your working life, you have probably saved a substantial nest egg. Now it is time to begin reaping the rewards, but you will need a careful plan to help ensure that you don't outlive your accumulated money.
Remember, if you retire at age 65, you could live another 20 years or more, which means you should still be in a long-term planning mode.
Things to Consider:
Re-examining Your Investment Strategy
Until now, your strategy has probably been focused on long-term wealth accumulation. Now that you are retiring, some of your goals will change. You will be withdrawing money from your retirement accounts, rather than accumulating, so you will probably need to reallocate some of your assets to investments designed to meet your short-term needs. But some of your needs are still very long-term, maybe 20 years or more, so you may not want to entirely abandon your long-term investment approach.
Balancing Your Risk Tolerance and Your Future Needs
Sometimes retirees become risk averse. Without a steady income from a job, they worry that their nest egg will erode unexpectedly, and they react by seeking very low-risk investments. Before you change the overall mix of your portfolio, remember that your goal during retirement is to maintain your financial independence for your entire lifetime. This means inflation is your enemy, and your investment strategy should be designed to at least outpace inflation, if not continue to build your nest egg.
Choosing Your Retirement Lifestyle
You will still need a budget during retirement. To estimate what your monthly expenses will be, choose the lifestyle you want to live and then make cost estimates.
If you plan to continue living your current lifestyle, a rule-of-thumb estimate is 80% of your current expenses. This estimate is based on the assumption that your cost of living will drop when you no longer have work-related expenses such as commuting costs, dry cleaning, and restaurant lunches.
Many financial professionals suggest, however, that you plan to maintain 100% of your current costs, or more. Some retirees will actually need more money because they plan to travel, play extra rounds of golf, or participate in other expensive recreation. The choice is personal, but you will need a budget to keep from spending too much of your accumulated wealth too quickly.
If you determine that your retirement income will not support the lifestyle you have chosen, you may need to make some adjustments. Many retirees plan to supplement their retirement incomes by working part time or turning a hobby into a small business, for example. If your nest egg appears to be a little short, the best time to find out is when you still have time to add supplemental income or even decide to work full time for an additional five years to help provide a budget cushion.
Adding to Your Life Expectancy
Life expectancy depends on a lot of factors, including the state of your health, heredity, and even luck. Taking all of this into consideration, you'll need to estimate how many years you will need to budget for. Your goal is to maintain your financial independence, so the best approach may be planning for an exceptionally lengthy retirement. On average, a 65-year-old retiree could probably expect to need to live on retirement savings for at least another 20 years. For retirees with particularly long-living relatives, a 30-year life expectancy, or even longer, could be more accurate. You will need to make this estimate based on your personal circumstances and then budget accordingly.
Preparing for Emergencies
A long bout of illness or other unexpected expense during your retirement years can alter your planning. To prepare, you might consider purchasing long-term care insurance or catastrophic health care overage to help protect your accumulated wealth. You might also want some additional assets in an emergency fund, perhaps invested in short-term investment options, so you can tap that money whenever necessary.