Make Your Money Last
Making your money last throughout your lifetime used to be so easy: retire at 65, buy bonds and live off your pension and social security. No sweat. You weren’t expecting to live much past 70 or so anyway.
Things have changed. Interest rates are at historic lows, pensions are rare and longevity is on the rise. Your bonds may only earn 2% and you’re likely to live well into your 80s, if not 90s. And pensions, forget it, the vast majority of us are on our own in today’s 401(k) world.
Given these conditions, I believe making your money last will be the single greatest financial challenge most people will face in this generation.
A Seven-Step Process
I view the challenge of how to make your money last as a seven-step process. Let’s touch on each of these briefly:
Plan your retirement: Examine your priorities. What do you want out of your remaining years? Does your spending reflect those priorities? Create a financial plan: Fit your priorities into a financial plan, make sure the costs fit. Determine your portfolio allocation: Use your financial plan to set your target investment return. Select an asset allocation that can generate your target return and fit with your risk tolerance and time horizon. Invest with a low-cost investment strategy: Use traditional ETFs to keep costs low and taxes low, with global diversification. Don’t get talked into high-priced products. Remember that costs generally don’t add value; they directly reduce your returns. Manage long-term portfolio risk: Avoid emotional trading. Maintain your asset allocation by trimming positions after major rallies and capitalizing on significant market declines to buy securities at bargain prices. This is what I call opportunistic rebalancing. Calculate portfolio withdrawals: Don’t trust this to back-of-the-envelope guesses; it’s too important. Many people use the 4% standard withdrawal rule, but that may not fit your personal situation. Instead, use high-quality software to determine your portfolio withdrawals. Beware of easy-to-use apps. If it’s easy to use, chances are the software is making a lot of assumptions, some of which may not fit your case. Monitor, Revisit and Update: Monitor your progress, update and revisit to keep on track. Be sure to check each year whether you’re on track and make adjustments as needed.
Related: Why Your Retirement Is More Important Than Saving for Your Kids Tuition
Five Key Takeaways
Looking at the big picture, here are five key takeaways:
Plan for a long retirement: 95 or more, considering your health and family history Focus on two levers you can control: How long you work and how much you spend Invest in traditional ETFs: Keep costs low, taxes low and maintain your asset allocation Turn volatility into opportunity: Take advantage of downturns to buy equities at bargain prices Take portfolio withdrawals carefully: This is the most complex part of the process. Use high quality software and keep assessing your situation to make sure you’re on track.
Making your money last may be the most complex financial challenge you face in your lifetime. Don’t trust it to the back of an envelope. This might be one time in your life in which you reach out for expertise. In any case, do your homework and do it right – the stakes are too high to skimp on this one.
