Yahoo Finance 4 Ways to Improve Your Finances in Retirement
It takes years of consistent saving and prudent investment decisions to amass enough money to retire comfortably. And the need to effectively manage your money doesn't stop when you leave your job. You must continue to make sound financial decisions in retirement to help your money last the rest of your life. Here are a few ways you can improve your finances in retirement.
The 4 percent rule. Once you retire, it's your responsibility to make sure your money lasts throughout your lifetime. One strategy to do this is to withdraw 4 percent of your initial portfolio balance each year, and adjust that amount for inflation in retirement. But it can be difficult to stick with a consistent 4 percent withdrawal rate, because your retirement expenses might fluctuate from year to year. When stock market values tank, finding a way to withdraw less from your portfolio will help your nest egg to recover faster. And if some of your costs increase in retirement, you might want to change your buying patterns rather than increasing your withdrawals.
Delay taking Social Security. You don't know how long you will live in retirement, which makes it difficult to know how much you can safely spend each year. Those who delay taking Social Security benefits get an increase in monthly payments, which is also indexed for inflation for the rest of their lives. You will never really run out of money as long as you have Social Security payments coming in. However, by waiting until 70 to collect, you are giving up eight years of additional income that can be used for discretionary expenses in exchange for higher payments after age 70. Those who delay Social Security checks might have to sell more investments to pay for expenses until they sign up, which means a smaller portfolio earning investment gains. Delaying Social Security can be hugely beneficial, but it's not a forgone conclusion that it's the right choice for everyone.
Work one more year. Working an extra year gives you more income to add to your retirement savings, and allows your existing savings to grow for an extra year. Even a part-time job can improve your finances and allow you to withdraw less from your portfolio. However, you need to weigh the benefits of having more money in the coffers against the freedom gained by retiring earlier. Working one more year comes with stress, and 12 fewer months of enjoying the money you worked hard to accumulate. Some over-savers end up working longer than they need to in an effort to give themselves extra security.
Find a more optimal way of managing your assets. You can definitely spend too much time looking at your retirement plan. Especially for those who enjoy managing money, it's easy to fall into the trap of thinking there's going to be a better way. What ends up happening is that sooner or later, you make suboptimal moves that end up costing you money. Making changes to your investment portfolio often triggers taxes and fees. The best way to manage your retirement finances is to take a serious look at developing a plan, set it in motion and then stop tinkering. You probably won't find the perfect plan, but you can set up a diversified portfolio that will generate consistent investment growth throughout retirement.
David Ning is the founder of MoneyNing.com.
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