Retiring early means making cash last
It will be hard to go back to work to avoid running out of money
Dear Money Lady:
We have decided to retire early. I am 56 and my husband is 59. How can we make our money last?
Carla
You’ve planned to leave the rat race behind and retire early. Good for you.
I can guarantee it will take less than two months into retirement before you start thinking: “What if we run out of money?”
The reality is people who plan for early retirement actually prepare better than those who retire at 65, the age society teaches us is the right time to retire.
Once you retire, it will be hard to consider going back to work as a fall-back to running out of money, so you must make sure your plan has builtin safeguards. Whatever your age in retirement, it is always necessary to protect yourself against unpredictable financial challenges.
Retirees generally want to keep their money safe and often choose savings accounts or GICS. I know for those of you who love these products this will be hard to hear, but they are actually the most dangerous savings tools in the long run. GICS and savings accounts cannot grow enough to protect your future purchasing power.
Investments that seem to have more risk, such as securities because they fluctuate in value, actually are the most likely to protect you in the long run because they have the greatest potential to increase in value.
I agree you have to protect yourself against investments that carry volatility risk by holding stable assets (such as bonds) but you still don’t want to invest so conservatively you miss out on the growth you need to make your money last for your full retirement.
It is always best to have a professional adviser review your personal situation, but for those of you who would like a general conservative investment strategy, this plan will allow you to get more accustomed to the feeling of holding securities while still providing a controlled asset allocation.
This is what I used to advise clients to do on their own while they were building up their savings toward future goals. You would invest in tandem:
• 33 per cent into cash products, GICS, saving accounts, short-term bonds
• 33 per cent into bonds or debentures
• 34 per cent into securities (stocks, exchange-traded funds, mutual funds, etc.)
Ultimately, there is no answer that is best for everyone, but general age-based guidelines are helpful to ensure you don’t go too far in either direction to reach your goals.
The old standard allocation advice was to subtract your age from 100 to determine the percentage of your invested assets you should have in stocks. So, if you are 40 years, you would have 60 per cent in stock or securities and 40 per cent in bonds. If you were 70, you would have 30 per cent in securities and 70 per cent in bonds and money-market accounts.
Once you’re ready to retire and have decided how much you can safely spend each year, don’t stop planning. You must continually stay current on the latest trends and market conditions.
Here are some ideas to keep in mind as you modify your plan through the years:
• Determine your asset allocation for long-term growth and risk management.
• Decide on a withdrawal strategy to use day to day, as well as a bare-bones budget, and determine how you’ll cut expenses if you need to.
• What are your sources of capital, if needed, in an emergency?
• Create an estate plan (will, powers of attorney, insurance).
• Determine how you will handle divorce, splits or the death of a partner.
Early retirement or later, whatever it looks like to you, make sure you never stop planning so you always have the life you deserve with everything you dreamed.
Christine Ibbotson is author of How to Retire Debt Free & Wealthy and Don’t Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus. If you have a money question, visit askthemoneylady.ca, and check out the Money Lady’s podcast at Saltwire.com.