Retirees can use any number of strategies to secure their financial future, all of them boiling down to the fundamental idea that you have to develop an income stream, then manage your expenses so what goes out doesn’t exceed what comes in. It sounds simple. But what seems perfectly reasonable in theory sometimes isn’t so easy to put into practice.
Keep some cash. You don’t walk around with an empty wallet, and you shouldn’t try to run your life without keeping a cushion of cash available for nasty surprises or unexpected expenses. This is especially true when you’re retired and not in line for a raise, bonus or hefty commission from a big sale. Many financial experts suggest keeping six months of expenses in a savings account or money market fund. I use a different metric for retirees. I suggest keeping five years of “extra expenses” in a cash account. Extra expenses consist of the amount you spend every month, minus the income you receive every month from pensions, Social Security and other recurring income. So if you spend $1,000 more a month than you take in, you should keep about $60,000 in cash.
Income. It’s one thing to own a pile of assets when you’re retired. It’s quite another issue to figure out how to turn those assets into a monthly stream of income to pay your bills. Some people invest in bonds, dividend-paying stocks or rental real estate. However you do it, you should have a long-term strategy. You should also realize that it’s not an easy job, and so you may need the help of a financial professional to produce the income you want out of the assets you have.
Social Security. For many retirees Social Security is their main source of income. Because it’s so important, you should think about when to start your benefits. Some people grab them as soon as they can, at age 62. Others think there’s some special virtue to waiting until they reach full retirement age, which for most of us is 66. Here’s a better way to look at it: You're eligible to begin benefits anytime between ages 62 and 70, on a sliding scale. The longer you wait, the bigger your check.
Stocks. The average person who retires at age 66 can expect to live another 18 to 20 years. That’s plenty of time for the financial world to change completely, especially if inflation kicks in again. You should own a piece of that financial world, so when things change, your own financial condition will change with it. For most people, this means owning a piece of a business. And for most of us the way to own a business is to participate in the stock market. It doesn’t mean you should chase Internet stocks. It means you should put a portion of your assets in a highly rated, low-cost mutual fund, so at least some of your assets can grow along with the American economy.
Mad money. Hopefully, there is something to your financial life beyond covering your monthly housing expense and meeting your car payments. After all, what’s all this financial planning for if not to supply some income to fuel your retirement dreams? So go ahead, dream up some adventures, whether they involve traveling to exotic places or doing something special closer to home. You’ve worked long and hard for your retirement, so dedicate a portion of your resources to enjoying life now that you’re no longer tied down to the 9 to 5.
Economize. This may seem to contradict the M of KISS ME, but it doesn’t. The more you economize in areas that are not important to you, the more money you have available to spend on your dreams and passions. A lot of seniors join a fitness club to keep themselves healthy and happy. This is a great thing to do. But be honest. Don’t pay for a gym membership if you never use it. The same thing goes for cable TV, a smartphone or a second car. Economizing does not mean cutting back. It means prioritizing – spending money on what you want, and cutting out the things that aren’t important. In retirement, there’s no more need to keep up with the Joneses.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.