I’ve spent years studying what makes retirees thrive, as opposed to those who struggle in their golden years, and it’s not rocket science. In fact, I think it’s more about avoiding pitfalls that most people run into. My research brought me back to many of the same questions I see time and time again.
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Planning for retirement can seem like a daunting task, but many personal finance experts suggest some key pitfalls to avoid.
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Securing passive income and proper planning for future expenses can lead to a happier, more comfortable retirement.
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Here’s advice from some top experts on three key topics that I think deserve more discussion in the baby boomer community right now.
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It seems to me that there are some Americans who find themselves in a similar predicament, mostly by falling into a few key pitfalls that I think are hard to see in the short term but relatively easy to plan for (for those thinking long term). Here are three key financial moves that many advisors advise baby boomers to make, and it’s advice that I plan to implement on my own journey.
passive income vision
There’s a reason most personal finance experts continue to preach the mantra “it’s better to time the market than to time the market.” Investing early and often is the way forward for all of us – it’s a time-tested strategy and allows investors to fill out 401(k)s and IRAs as they begin to access that capital in retirement.
That said, when it comes to allocations, the portfolio we choose is very important. No one really wants to be forced to sell their high-growth assets, especially during a bull market. Therefore, having some income-producing assets that generate cash (ideally enough to live on) can help ensure that a retiree’s portfolio remains relatively intact, at least during the first few years of retirement.
Designing a salary sounds simple, but there are many options to choose from. Of course, there will also be Social Security payments, which will soften the blow of having to do everything yourself. But choosing between fixed-income investments like bonds, dividend stocks, annuities and other financial products can be a more difficult task.
I think tilting your portfolio more toward ultra-low-risk Treasury bonds (instead of a traditional 60/40 portfolio, maybe toward a 40/60 portfolio) in retirement may be the right choice, with dividend-yielding stocks being a healthier percentage of the portfolio. This isn’t just me saying this, most personal finance experts I meet feel the same way.
money vision
Sequence risk can be the silent killer that many in the personal finance community keep warning about. Those of you who retired during or around the financial crisis or other recession know what I’m talking about. If a market crash of 50% or more occurs during the first few years of retirement (hopefully not), it could cause a major setback to one’s spending goals in the long run. Losing this much capital up front could have a devastating impact on plans to draw down 4% or more of a portfolio (this ratio may need to rise significantly to break even, especially for those with less savings).
So, going back to my first point, setting aside enough money upfront in low-risk investments can help mediate that risk. I think having about five years’ worth of living expenses in cash (or a cash-like investment, such as a graded portfolio of Treasury bonds maturing at different times) could be a good way to bridge the gap and provide an “oxygen mask” independent of market cycles.
No one wants to experience a devastating crisis when we are just beginning our retirement journey. Those who want to spend money and enjoy their retirement may want to consider an ultra-conservative stash of funds. This seems like a prudent idea to me given the heightened risk we’re seeing in the market right now.
Elderly man is being examined by doctor
Regrets often have their worst consequences for those approaching retirement: Ignoring the impact of soaring health care costs can affect a person’s spending trajectory in retirement.
A 65-year-old couple can now expect their first-year medical expenses (not including Medicare) to exceed $1,000 per month. So, going back to the passive income argument, it’s important to have enough income-producing assets to help close that gap. That’s because we all need a place to live and a place to eat.
Experts say there is a “golden window” in post-paycheck, pre-Social Security life where seniors will have to bear more of the burden of medical costs, especially for those who want to delay receiving Social Security benefits until full retirement age.
An incapacity plan, whether through a power of attorney or a long-term care rider, is also a great strategy for those who lie awake at night thinking about soaring medical costs. As inflation on this critical cost input for all seniors is likely to continue to rise, this is something I am actively considering planning for sooner rather than later.
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