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| Retirement communities
guide
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How To Maximize Your Retirement Benefits – Make The Best Of What You
Have
Maximize your pay in a downturn, your retirement benefit figured, military
retirement pay increase
There was a newspaper ad., wherein an anonymous reader had stated that
he/she had just retired and wanted to know how to manage and invest his
money so that he/she could live comfortably on throughout his/her retirement.
Reading it was sweet! Just think about it; after years of long work, saving
whatever you could and investing it you retire and are about to embark
on a long retired journey. The years of hard work are a thing of the past
and it is time to lie back and enjoy the rewards of the retirement planning
that you carried out through your working life. But is it? Well, up to
a point you are right. You have earned the right to lead a life that is
peaceful and contended and engage in activities that you always wanted
to but did not find the time to do so. A spot of gardening, going fishing,
straightening up your stamp or coin collection or some other hobby or
pastime that was long neglected r yearned for.
But retirement does not completely free you from retirement planning.
Even though you might have started out early in saving regularly and investing
your savings in some safe and secure securities, you still have to keep
your eye on these investments and see that they do not give out before
you do. Managing your assets after retirement is just as important as
having created it.
Basically there are two main tasks you have to get a grip on: how to invest
your savings and other retirement benefits that you may receive now that
you are going to draw from it and not build it; and, second, to see that
those withdrawals do not drain your resources too soon.
Investing It
Let us take the issue of investing first. It is the considered belief
of most retirees that it is best to play safe and limit their foray into
the stock market by investing only in bonds and maybe a small portion
into dividend paying stocks and shares. This is a mistake. The fact is
that most retirees are going to spend some 30 to 35 or even more in retirement
and while it is natural that you should want to protect your assets, you
have to see that it also grows. If not, the purchasing power of what you
have will shrink as you grow old and might force you to lower your standard
of living in the fag end of your retirement.
There is no ideal or correct mix of stocks and bonds for each and every
retiree. The combination that is right for you depends on your age and
the risk you are willing to take on the volatile stack market with its
ups and downs. An ideal combination would be 40% of stocks and 60% of
bonds.
The 40% in stocks should ideally be spread among various stocks or stock
funds that include both small and large companies and preferably with
some international exposure as well. The remaining 60% in bonds should
also be spread among various bonds. Bonds like those of treasuries and
high-grade corporates. And depending on your capability for taking risks,
you may even invest in high-yield bonds also called junk bonds. Regarding
maturities, most will stick to short term to intermediate term ones. As
you age, you can transfer the more volatile stocks to the more safer bonds.
The reasoning behind this is simple. The older you get the lesser time
you will have to recoup from any loss that your portfolio may experience.
It is not necessary for you to keep constantly changing the proportion
of bonds to stocks. By the time that you are around 75, you could lower
your stakes in stocks to 30% and when you pass the age of 80, to 25% and
so on. Going below 20% is not advisable because, with the continued increase
in the lie expectancy of the average American, you could live for a decade
or more and you would still require some sort of growth in your assets.
If you are not happy with a portfolio of stocks or stock funds and bonds
you can think of a different kind of funds known as “target funds”. Actually
you pick a target date that is close to the year that you will retire.
If you are already retired, there is a target fund for retirees also.
Post-retirement or pre-retirement, the fund you choose will contain a
diversified combination of stocks and bonds appropriate to your age. You
can always get more details of these funds form the Internet.
Withdrawing It
Coming to the issue of withdrawing money from your portfolio; the idea
is to prepare and set a plan that will provide a reasonable flow of money
but also ensures that the resource will last a good thirty years or so.
This is where many people have unrealistic expectations. A survey carried
out among pre-retirement employees found that nearly 67% of them thought
a 7% withdrawal would be just sufficient. Given the historical rates of
return, this figure of 7% seems plausible. But a more prudent withdrawal
rate would be around 4%. This is more prudent for a couple of reasons.
First is the effect of inflation. Because of inflation, as you grow older,
you will have to draw more money to maintain your standard of living and
your purchasing power.
For example, suppose that you had $500,000 in your savings. A 4% withdrawal
rate would mean about $20,000 for the first year of your retirement. If
inflation moved along at a constant 3% , then in 20 years your withdrawal
would increase to $36,000 and to $49,000 in 30 years. So keeping the withdrawal
rate will decrease the strain on your portfolio growing to meet your future
needs.
The second reason is that if there is a downturn in the market, it creates
more havoc on your portfolio during your retirement that when you are
building it up.
Fundamentally, losses in investments have a combined double effect. Your
investments lose value because of negative returns and at the same time
reduce in size because of your withdrawals. Which results in your having
lesser capital to recoup when the market rebounds. An early retirement
market slump is even more dangerous in that this combination may use up
your investments to a point from where it may never recover.
A higher withdrawal rate would, of course, work out just perfectly if
your investments are earning a higher return due to a more aggressive
investing policy and if the market performs well without any hitch. Nevertheless,
higher withdrawal rates will increase the odds of your depleting your
resources earlier. Detailed calculations based on age, levels of withdrawal
and different investment strategies that will affect your investments
can be checked out in a number of websites on the Internet, notably that
of the T. Rowe Price Retirement Income Calculator. Fidelity has also introduced
such a website recently.
Various other ways to manage and avoid outliving your assets are available.
Setting aside a portion of your assets to a “payout” annuity – an annuity
that guarantees an income for life – can appreciably increase the odds
that your investments last a life time. But you have to be wary of those
annuities that come with bloated fees that weaken their objectives. Another
method is to develop a tax smart withdrawal strategy that will help you
to increase your spendable income and make your assets last longer.
Providentially, once you have developed a long term plan for the investment
of your retirement assets and also withdrawing them reasonably, most of
your retirement planning, the hard part, is over. Once this is over, the
only thing left is to monitor the financial progress and make necessary
changes according to the changes in the stock market rates. This should
leave you with more time for the actual enjoyment of your retired life.
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