How to Insure your Retirement Security
The last ten to fifteen years have been financially very good for most of us. With a little effort and a lot of market tailwind, our retirement accounts have grown at an amazing rate. With annual stock returns as high as 20% or more, most of us who have private retirement investment accounts (401K, IRA, etc.) were feeling pretty good. In most areas of the U.S. real estate values spiraled up and up. The combination made many of us who owned homes and stock/bond investments paper millionaires. Then along comes 2008. Our stock investment portfolio values dropped 35-40% and our once fat equity position in real estate rapidly shrunk. Your retirement account doesn’t look so secure anymore.
Here are three suggestions for making your nest egg last as long as you do.
Take a Careful Look at Your Present Cash Flows
It’s best to do this on a monthly basis as most expenses and income are easily calculated on that basis. A financial software package is an excellent tool to help you structure this part.
List your monthly cash income in detail by source, i.e. Social Security, pension, rental income, etc. You may already be drawing a fixed amount monthly from your retirement accounts. If you aren’t, here is the place to decide what that amount is going to be and enter it as cash income. A word of caution here: be certain you understand the rules regarding withdrawals from IRA and 401K type retirement accounts. You might want to visit the IRS website for a careful review.There you will find some information on the minimum withdrawal rates required by the IRS. Deciding the maximum you want to withdraw is up to you. Most experts will recommend that you limit the maximum annual amount to no more than 4% of the remaining balance. That’s a good place to start. Use the larger of the two numbers for now, you can refine it later.
Next list your monthly cash expenses. These should include everything you have to purchase as well as all scheduled payments. This will take some thought; it is easy to forget the small things like an occasional meal or movie, car repairs, etc. Include some “unplanned” expenses like subscription drugs, co-pays and other medical items. At this stage it is probably easier to average some expenses that don’t occur monthly. If you don’t include insurance or taxes in your monthly mortgage expenses, make sure they are included here.
If you have used a financial software package, you can enter the above data into the budgeting portion of the program, and you now have a preliminary view of your monthly cash flows.
Develop a Realistic Monthly Cash Flow Budget
If the preliminary budget you came up with in the prior step yielded a positive cash flow, you are starting from a good place. Go over your budget once more, refining the monthly cash outlays. Be more precise in detailing regular monthly expenses that you averaged in step one. You may want to build in a “set aside” account to accumulate cash to be used for extraordinary items like auto repairs and other fairly large expenditures which do not occur monthly. Emergencies will always occur at the least convenient times, so provide for them in your budgeting process.
Take Action Now to Deal with Any Negative Cash Flow
Revisit your monthly budget; looking for spending you can reduce or eliminate. Can you reduce the big cable TV bill by switching to basic service, or drop that membership in the local gym? Maybe shop at discount stores instead of Macy’s, etc As distasteful as it may be, you are going to have to eliminate or reduce some expenditures, including bills that are not going to get paid right away. You will be surprised how flexible lenders can be if they know you are making a good faith effort to pay, so get on the phone and negotiate a payment plan you can live with.
If you have cut discretionary expenses to the bone and still have a negative cash flow, you need to look at the income side. If the difference is small, perhaps a small increase in the withdrawal amount from your retirement account is in order. Particularly if you think the problem is short term (less than 3-5years). Be very careful here; a rate exceeding 10% is very likely to deplete your retirement account in 7-10 years. If you aren’t in a position to do this, then it is time you look at some more painful alternatives.
Perhaps a part time job would make up the difference. If you own real estate or other tangible property, perhaps now is the time to consider selling. Consider “downsizing” to a less expensive home, or even renting for a while. The market is depressed right now, but there are still buyers out there. The price of that smaller house or condo has suffered the same decline in value that yours has. Perhaps a “reverse mortgage” would be right for you. However I wouldn’t recommend that before getting professional advice.
If you can’t make it work, find a good, reputable CPA firm that offers financial planning services. They can give you a well rounded view of your options. It is probably too late for a conventional financial planner to help, particularly the “no fee” planners. They rely on selling you something to make their living, and the last thing you need now is to buy anything new.