Playing Their Part

Jonathan Clements

OUR RETIREMENT INCOME is built on a slew of financial products and strategies. But we should think less about the gory details of each—and more about the role they play in our overall retirement finances.

The fact is, while each of us comes to retirement with different levels of wealth and different desires, we all want both a sense of financial security today and confidence about our financial future. How can we best meet those twin goals? We might think about our retirement finances in terms of seven dimensions:

1. Setting a floor. Arguably, our fixed living costs should be the starting point for our retirement-income plan—because, if we’re struggling to cover property taxes, insurance premiums, utilities, grocery bills and other recurring costs, our final years will likely be awash with financial stress.

To that end, we should figure out how much we need each year to, quite literally, keep the lights on. Would it be prudent to reduce that annual nut? This, of course, is the reason folks downsize, sometimes coupled with moving to a lower-cost and lower-tax state.

2. Building in flexibility. Fixed costs have to be paid. But discretionary spending—we’re talking fun stuff like travel, eating out, concerts and more—is easily cut. No, we don’t want to nix next year’s trip to Hawaii. But varying our discretionary spending is an important financial lever, one we may have to use if we get hit with, say, hefty medical expenses or brutally bad financial markets. What would we cut if our financial life took a turn for the worse? Each of us should have some sense of our spending priorities.

3. Buying predictability. Where will we get our retirement’s spending money? It could either come from selling assets—our home, stocks, bonds, cashing out part of a savings account—or via regular income. The latter might include dividends from stocks, interest from bonds, pension income, annuity income and Social Security.

It can be a mistake to invest solely for income by, say, chasing higher-yielding investments. Still, receiving ample regular income can make retirement less financially stressful, and it’s a reason folks might want to delay claiming Social Security to get a larger monthly check, and perhaps also purchase immediate-fixed annuities.

4. Cushioning crashes. Many retirees focus less on generating regular income and more on gunning for growth, with an eye to periodically cashing out stocks and bonds to pay living expenses. What if we get a year like 2022, when both stocks and bonds got pummeled? As a precaution, consider setting aside five years’ worth of required portfolio withdrawals as a financial safety net. We might stash these dollars in money market funds, high-yield savings accounts, short-term certificates of deposit, high-quality short-term bond funds and other super-safe investments.

5. Fending off inflation. Recent inflation has been a wakeup call for many retirees. But the truth is, even modest inflation can put a big dent in a retiree’s lifestyle after 15 or 20 years. What to do? As a hedge against higher costs in our late 70s and beyond, we might save some of the income we receive earlier in retirement.

But perhaps a better route would be to delay Social Security and purchase inflation-indexed Treasury bonds, both of which are designed to keep up with inflation. Retirees might also include a healthy allocation to stocks in their portfolio. While stocks come with no guarantees, a well-diversified portfolio should outpace inflation over the long haul, especially if we also have a cushion of cash that allows us to avoid selling during bad markets.

6. Protecting the long end. What if we outlive our savings? Just in case, we might want longevity insurance, in the form of income that’s guaranteed to last as long as we do. The most common form of longevity insurance is Social Security. Indeed, because Social Security also provides both inflation protection and reliable income, it’s one of the keys to a financially successful retirement—and I, for one, want as much of it as I can get, which is why I plan to delay benefits until age 70.

But Social Security isn’t the only form of longevity insurance. Many folks also have traditional employer pensions, and some have annuities that pay lifetime income, including both immediate-fixed annuities and deferred-income annuities. The more longevity insurance we have, the more risk we can take with our other money and the freer we can be in spending down our nest egg.

While I’m not a fan of long-term-care (LTC) insurance, it can also be viewed as financial protection for our later years. If folks have an LTC policy and hence they know they can at least partially cover such costs, that can free them up to spend more of their nest egg early in retirement.

7. When all else fails. The tighter our retirement finances, the more we need to ponder this issue. How will we cope if our retirement savings start dwindling and we’re faced with expenses we simply can’t cover. This is where our retirement’s financial backstop comes in. We might have to spend home equity, perhaps using a reverse mortgage. We might need to dip into the money we’d hoped to leave to the kids. We could have to cash in that old whole-life insurance policy we’ve been hanging on to.

None of these options is especially palatable. But as with the discretionary spending cuts we might make if we got hit with a financial emergency or a bad stock market, it’s worth pondering what our retirement’s financial backstop is, so we’re prepared if that time ever comes.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney, on Facebook and on Threads, and check out his earlier articles.

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