3 Ways to Protect Your Retirement Savings & Pay Yourself
- Posted by Gary Krasnov, AIF®, CLTC®
- On September 29, 2020
Once you retire, how do you protect your portfolio so that it preserves principal and generates adequate income? While challenging, it helps to think of retirement as the time in life when you are going to be paying yourself.
Yes, paying yourself, but with a small caveat.
Popular advertising campaigns have led us to believe that you use your career to save, and then the very day you retire, you begin to spend your money. Some months, of course, you don’t spend too much, and your savings stays mostly intact. Other months, however, the roof of your house leaks, you take a cruise, and your eldest child needs help buying a new car. Those are the months that, if you aren’t invested well, you spend too much of your savings principal, and that lowers your future income.
When it comes to achieving retirement goals, I’ve found that most good savers want roughly the same things. First, they want their investments to be allocated correctly so that they are as insulated as possible from market corrections (nothing worse than suddenly losing a big chunk of cash late in life). Second, most people want to have saved enough money to live a life of their choosing. And, third, they want enough money so they can live without having to constantly worry that they might eventually run out of cash.
If you’ve saved well, and created and followed a well-conceived plan, there’s absolutely no reason you can’t have those three key things.
That said, while I can’t possibly know your precise financial situation, I can help you start to think of yourself as a lifetime employee of your own company… which we’ll call, “Your Personal Retirement, Inc.”
When I work with a client, one of the first things we do is to evaluate the retirement income sources they’ll be receiving from “Your Personal Retirement, Inc.” Simply, how many funnels of income will you have access to (pensions, retirement accounts like IRAs and 401(k)s, Social Security, bond funds, inheritances, a portfolio of equity funds, and rental properties, just to name a few) once you retire and only work for yourself?
The key here, then, is to protect those sources, especially those that generate income from savings or investment principal, at all costs.
Here are three important ways to protect your savings principal so you can continue working for “Your Personal Retirement, Inc.” for 30-years, or more.
1. ADVANCE TAX PLANNING CAN SAVE YOUR SERIOUS MONEY
I’ve helped save clients tens of thousands of dollars by looking at their various savings accounts and investments and by creating a money-saving tax strategy that helps them select which accounts, investments, and income sources to use to pay themselves, and, most importantly, when to use them.
Most people think they should use their taxable accounts first, and keep their tax-deferred accounts, things like IRAs and defined contribution plans, in reserve for later.
It seems like a no brainer to just let those retirement accounts keep growing.
The problem is, that eventually those Required Minimum Distributions (RMDs) kick in, and if those accounts have been well-funded, when you’re due to take an RMD, depending on your other income, you may well be shoved into a significantly higher tax bracket (than is necessary). There are effective tax strategies that can be used to mitigate this so sure to talk to your advisor.
2. CRUSH DEBT AND LIMIT WASTEFUL SPENDING
Make no mistake, debt is the killer of retirement dreams. I work with my clients to create a plan that allows them to retire debt free. That’s because money not going out is the same as money coming in. Because, really, it doesn’t matter how much money you have coming in, if your monthly outflow eats it all up, you could quickly find yourself in the same situation as someone who didn’t save anything, at all.
When it comes to people who’ve saved well but can’t make their money last, debt and wasteful spending are usually the culprits.
So, a few tips: Whatever you reasonably assume your portfolio will generate (in terms of income), make your assumptions that it will generate 15% less overall.
Second, if you’ve saved well, but you still can’t retire without a mortgage, in some circumstances, rather than deplete all your savings and pay it off, you might actually want to refinance your mortgage out as long as even 30-years to lower your monthly payment and improve your cash flow. (Be sure to speak with your advisor first to ensure this is the best option for you.)
Your early retirement years are likely to be your most healthy and active. Paying off your mortgage, if it makes sense, is often a great thing (and your heirs will probably thank you). But the benefits are lost if it takes 1/3 of your retirement savings and leaves you cash poor a few years down the line.
3. HOW ABOUT MARKET VOLATILITY?
If you want to remain well-employed by, “Your Personal Retirement, Inc.,” for the duration of your life, make sure your investment allocation matches up with your risk tolerance and time horizon. This basically means that, the closer you get to retirement, the more you should probably rein in your investment risk.
No one wants to lose 40% of their portfolio six weeks before they retire. And a carefully, and conscientiously allocated portfolio, should help protect you from this.
Also, it’s not only about your investments in the more volatile asset classes that you need to watch. Protecting yourself from market turbulence is why you need as many income sources as possible. While, ideally, you never want to tap the principal in your investment accounts, even during bull markets, you especially don’t want to partake in the double whammy of tapping those accounts for income when the market hits a rough patch and your investments are down.
Selling when your investments are down “locks” in those losses.
At one time, 20 or 30 years ago, it was a lot easier to say, “I’ve saved this much money, and that should be enough for the next three decades.” But a lot has changed since then. (Not the least of which is the explosion in healthcare costs.)
It’s no secret that retirement planning has gotten incredibly complex, and that navigating it free of turbulence takes a well-devised flight plan.
Even though a flight plan has a set beginning and end, you still must always plan for contingencies. Your retirement is the same, for as long as you draw breath, you’ll want to continue to monitor and adjust your retirement and investment plan.
The good news is, that when it comes to money and retirement, my experience has been that careful planning makes the process a whole lot more enjoyable.
WHAT DOES YOUR POTENTIAL RETIREMENT PAYCHECK LOOK LIKE?
Find out if you’re on track to meet your retirement income goal or if you’re falling short using our retirement paycheck calculator.
Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security.