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MY RETIREMENT finances today are based on actions I took over six-plus decades, starting at age 18. Early on, I tried my hand at picking stocks and beating the market—to my regret. As time went on, I became more sensible.
Want to avoid my mistakes? Here are 10 tips based on my lifetime of managing money:
I’ll add one more that’s a bit controversial and perhaps not for everyone: Take a small portion of your savings and buy a few high-quality dividend-paying stocks when you’re young, reinvest the dividends and let it ride. Down the road, that’ll give you a stream of income from the dividends.
At my urging, two of my grandsons, ages 15 and 19, just bought a few shares of my old employer, Public Service Enterprise Group (symbol: PEG), along with a few mutual funds. Public Service Enterprise Group has paid dividends for the past 117 years and today comprises about 17% of my portfolio. I wouldn’t suggest that relatively high percentage for anyone who depends on their portfolio for their living expenses. I have a misplaced loyalty—but I also have the safety net provided by a pension.
The dollar amount you have to save and invest isn’t important. It will always be relative to your income, but so will your living expenses in retirement. The important thing is to get started.
But saving for retirement is arguably the easy part. Up next: using the money in retirement. I see one basic question: Do you set your spending budget first and let that determine your annual withdrawals, or do you settle on a prudent amount to withdraw each year and then let that determine what’s available to spend? When working, your income determines your ability to spend. Should retirement be any different?
A person living on a $60,000-a-year pension has no choice but to live within that amount. Similarly, a person using a percent withdrawal strategy should do the same.
Let’s say you have a $1.5 million nest egg. Your spending—including the sum needed for taxes—shouldn’t exceed $60,000 a year, assuming a 4% withdrawal rate. It doesn’t matter what you want to spend or what your budget says. Instead, your spending should be limited by what your accumulated investments can sustain.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on X (Twitter) @QuinnsComments and check out his earlier articles.
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I set my spending budget first and let that determine my annual withdrawals. My spreadsheet projects my retirement account balances for the next 30+ years, using projected spending, pension income, SS and retirement account earnings. If the combined retirement balance never falls below a threshold I am comfortable with, I go along my merry spending way.
What did you do before retirement? Income did not determine spending?
It did but why does it have to continue that way? I see a shift toward spending freedom as one of the joys of having saved for 40+ years. And, to me, it seems like a logical shift as you age. When you’re young, the uncertainties are limitless so you need to be more prudent and conservative. When you’re older, you have a pretty good idea how the rest of your life is going to play out. Might as well figure out what you still want to get done and go for it.
We are not retired yet but have a draft of a retirement spending budget. Our retirement income will be from the traditional three-legged stool (pension, SS, savings). We have a pretty good idea of what our combined pensions will bring in. The reason we’re working on/from a spending plan is to assess when to claim SS and if/when we need to draw from our retirement accounts. In other words, our income (or at least the sequence in which we receive it) will be based on our spending plan.
I’m also planning that we’ll start stress-testing the retirement spending plan one year out and save the excess. That will help us have a better idea of how realistic that budget is going to be. But I also think it’s going to be a work in progress for a couple of years.
Will that lead to the best choices if it drives early SS or higher withdrawals? Or will you still be limited in spending to meet your desired withdrawal strategy? Which potentially places you at greater risk, sources of income or spending?
Great post, Dick – simple and direct!
The achilles heal for many chronic save-for-tomorrow types was one of your first items listed…”Always have savings that aren’t earmarked for retirement—the proverbial emergency fund.”
I’d be interested in HD readers weighing in on their preferred “cash / cash equivalents” vehicle(s) for this safety money bucket.
A secondary item (but just as as important) is just how BIG a bucket for these dollars is warranted? Sock away year’s net HH spending? 6-12 months gross income for younger workers, or perhaps even a 4 year equivalent of a 50-something’s annual expenses to draw upon in the event of a large market downturn?
There are many cash bucket variables (based on age, Income, individual lifestyle, and degree of liquidity desired) to consider. I prefer simple, to be honest.
Thanks for sharing. Nice article!
Nicely summed up. I strongly endorse your final piece of advice. Its the after-tax value of our annual retirement withdrawals and social security benefits which determines what we can spend. A fair amount of this is not spent each year, but rather accumulates in the bank from year to year as a sort of escrow account for various future unpredictable but unavoidable expenses, such as replacing our cars, home repairs and remodeling. After all, the voluminous literature on various withdrawal strategies implicitly assumes defined future dollar amount withdrawals, without allowing for periodic extra future withdrawals for various expenses.
“ Don’t play the market with your retirement nest egg”
yes, i allocated 10k to play the market with my IRA. luckily, i haven’t losted that initial 10k. (full disclosure. i worked for a prominent mutual fund in my career and “almost” got the Series 7 certification). i only chose safe and stable companies.
Rich,
I used a tool to compare a 60/40 PEG vs VWIAX comparison. As co-holdings though, held in a theoretical portfolio of 100%, minus costs.
They seem to mirror one another closely fwiw.
https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
Your advice as always are timeless truths(imo). Viewed differently by different generations at different stages in life’s journey.
Very good info. For spending, the guideline might be whatever withdrawal % from investment portfolio you feel is safe, PLUS social security and any pension or annuity.
The guideline must be the total of any or all of them as may apply – or the result will be debt or excessive withdrawals.
Good stuff Dick. My only addition would be to automate savings as much as possible.
Excellent advice. Think how much misery could be avoided by early and regular saving?
Agreed. Between that and increasing savings/investment as income increases, you can mess up a lot of the rest and still be fine.
It would be fun to check on Dick’s grandsons in a few years, to see how their savings have grown. My daughter saves by default—she doesn’t spend. Any money that comes her way collects in her bedroom, to finally makes its way into the bank and her Vanguard account. I enjoy seeing her net worth increase as much as I do my own.
The trick now is getting them not to look at their accounts everyday or call me to tell me the PEG shares dropped in value today.
So true. No good deed shall go un-punished.