If you are like a growing number of Americans, then you probably dream of retiring before age 60. Of course, the “freedom 55” dream isn’t always attainable.
There is a lot of retirement planning that goes into a successful retirement and that’s even more true for people who have the opportunity to retire early.
People who work hard toward the goal of early retirement want to enjoy their golden years without having to worry about running out of money. Since they will need to draw on their savings for a longer period of time, their investment withdrawal strategies need to be very purposefully planned.
Part of a good retirement strategy should also include sound risk management and asset allocation strategies.
Retirees need to ensure their money is invested wisely in order to feel confident that their money will be able to last throughout an extended retirement.
There are a lot of aspects of early retirement, so how should early retirees set their investment withdrawal strategies in order to make the most of their retirement? Let’s take a closer look.
Managing the Rate of Withdrawal
Once you choose to retire, the savings that have consistently been building throughout your working years begin to draw down. Plotted out on a graph, it looks like climbing a mountain on one side and skiing back down the other side.
Skiing down the other side too fast can quickly put an end to an early retirement. That money that has been saved for years is required to last throughout retirement. For early retirees, that could mean 30 years or more of drawing on savings.
One of the popular rules used for determining investment withdrawal strategies is the 4% safe withdrawal rule. The basic idea is that retirees can pull out 4% safe withdrawal rule. The basic idea is that retirees can pull out 4% of their investments per year and enjoy a long retirement, even if markets have some poor years.
Understanding how to make your savings last with a planned withdrawal rate is also important for retirement planning when determining how much you need to retire.
Continue Growing While Withdrawing
That almost sounds too good to be true, right?
How can you withdraw from your savings while still enjoying some growth? If you use the 4% safe withdrawal rule you should be investing safely to help slow the rate of your savings decreases.
This is where risk management and asset allocation strategies come into play. Retirees need to see some interest gains in their investments to make their funds last as long as possible but they also need to avoid serious risk. That means no investing retirement funds in Bitcoin because one major drop in price could send retirees to the job board.
Instead, retirees should look to safe investment options like highly rated bonds with fixed interest returns. The returns can help offset the withdrawals without introducing unnecessary risk.
Budgeting for Spending in Retirement
We can discuss investment withdrawal strategies or formulas all day long but none of it matters if there is no budget or plan for spending in retirement. Following a safe 4% withdrawal rule with savings of $500,000 while also chartering private flights to Italy in the winter might not be the right strategy and spending should be adjusted to reflect the amount of savings available.
This example highlights the importance of retirement planning well before actually entering retirement. What are your goals? How much money will you need to meet those goals? Having clear objectives in retirement allows you and your investment advisor to set realistic savings goals to help you enjoy retirement the way you want.
Another part of budgeting that’s very important as retirement grows closer is tax budgeting. As you draw on investments and potentially begin collecting pension income you must be sure that you are aware of the tax implications and preparing to pay your annual tax bill.
There are investment withdrawal strategies that consider taxes. Retirement planning with an expert financial advisor is important to avoid any unpleasant surprises that could put a damper on your golden years.
Separate Cash and Investments into “Buckets”
The “buckets” investment strategy for retirees is a great way of simplifying the concepts for many people. You work with 3 buckets and plan your retirement using these buckets.
The first bucket is cash on hand. This is money that can be spent immediately and should cover a few years of expenses.
In the next bucket is fixed income investments like bonds. The interest from these buckets can be poured into the first cash bucket to help supplement income in retirement.
The third bucket is slightly longer-term focused and is usually invested into stocks or equities. This bucket can endure some volatility because the other two buckets offer stability and immediate access to cash. This bucket offers some growth to help slow down the rate of savings reduction as you begin to draw on your retirement savings.
Good investment withdrawal strategies will use some form of the buckets strategy and move money between the buckets carefully to protect against massive tax bills and loss of retirement income.
Connect With a Retirement Planning Expert
Not sure what buckets you should be filling and what percentage you should be taking from those buckets? Want to sit back and just enjoy your retirement? Trusting the advice of an expert at Mooney Lyons is a great way to set you up for retirement at any age.
Contact us today by calling 847-382-2600 and start planning your retirement, investment withdrawal strategies, and asset allocation. Retirement doesn’t have to be filled with stress. Plan now to enjoy the fruits of your hard work later.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.