Capital Investment Advisors

Are You On Track For A Happy Retirement?

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Retirement Savings, Income Investing and Lifestyle Planning for a Happy Retirement

Are you on track for a “rich” retirement? While we all want to be secure in our finances, many investors aren’t quite sure how to best achieve this goal. There are vital elements that the happiest retirees (and not just financially) have hewn to, and it’s made all the difference. I’m here today to help walk you through the components of smart retirement planning and tracking to set you on track to a happy retirement.

The main goals are to have a savings target, know your risk limits, create a smart mix of investments and have a “lifestyle plan.” These are the essence of genuinely golden years of post-career living.

Let’s take each component and dig deeper.

Targeting Your Savings Goal

Let’s do away with some common myths – you do not need to be a millionaire to be a happy retiree (the key number I’ve found for a couple is half that), you don’t need to work until you die as Suze Orman would have you believe, and you don’t have to live a pauper’s lifestyle to ensure your money never runs out.

You need to know how much money from your investments you’ll need during retirement. It all starts with a budget, taking into account your projected expenses. Be sure to include your “fun money,” as this is the stuff that makes for happy retirements.

Once you know what your nut is, calculate all of your non-investment income streams (like pensions, Social Security benefits, rental income, part-time work, etc.). What’s your shortfall? This is where your retirement assets kick in.

I use the $1000-Bucks-A-Month Rule to shore up the difference. The rule is simple: For every $1000 you need added to your budget from your retirement accounts each month, you’ll need $240,000 in your nest egg. The rule assumes a 5% withdrawal rate.

It’s important to note that this rule is a tool to help you visualize how much you’ll need; it’s not black and white. For instance, it assumes that you don’t adjust for inflation and retire between the ages of 62 and 65.

Taking a closer look, let’s see how $240,000 in the bank equals $1,000 a month:

$240,000 x 5 percent (withdrawal rate) = $12,000

$12,000 divided by 12 months = $1,000 a month

The 5% withdrawal rate works well in years that the market and interest rates are in a normal historical range. But you must be willing to adjust your withdrawal rate if market forces work against you in any given year. You may need to take less in those years. And when the market is flush, you can potentially take out more.

So, what’s your savings goal? If you’re not sure, I recommend sitting down and creating that budget we talked about earlier. It’s best to start tracking when you’re ten years away from retirement. Not only will it give you a clear picture of your financial need from your investments, but it will also allow you to make some tweaks if necessary before you call it a career.

Understanding Your Risk Tolerance

If there’s one undeniable truth about the stock market, it’s that there will always be turbulence. Some stretches are bumpier than others. The flip side is that sometimes it will soar higher than others. Still, it’s never going to be a straight line for investors throughout their market ride.

With this in mind, how much market volatility can you handle? This is a gut-check question. That’s where the answer lies – knowing where you fall on the risk tolerance spectrum is powerful information to have as an investor. It’s critical.

Here’s how I visualize the spectrum: On one end, having all your assets in CDs is a 1, with the other side being completely invested in small-cap and emerging market stocks is a 10. What are you?

Well, if you tell me you’re a 1, we’ve got some coaching to do about wealth creation. And if you tell me you’re a 10, you either have an iron stomach for market swings over the decade, are a hedge fund broker, or aren’t being 100% honest with yourself. Very, very few people are a 10.

Most people I work with fall right in the middle at a 5.

The philosophy of assessing your risk tolerance is that time in the market beats timing the market. You want to identify your particular comfort level with market swings, so you’re not tempted to jump in and out because of fear of loss or fear of missing out.

Now, you may know that you “should” be invested 80% in stocks because of where you are in life. But that may not feel comfortable to you, and if it doesn’t, it isn’t sustainable. Your actual risk tolerance is what you can sleep well with at night. Full stop.

I like to educate folks about a particular rule of thumb on this topic. It’s the 15/50 Stock Rule, and it states that if you believe you have 15 years left on this planet, your portfolio should consist of at least 50% stocks, with the remaining balance in bonds and cash.

This rule aims to create a consistent risk/reward balance while leaving you able to stay the course and rest well at night. Your stock allocation can be made up of either dividend-payers or growth stocks. Just keep an eye on your portfolio and reallocate as necessary to stop stocks from tiptoeing beyond the 50% mark.

Keeping Your “Buckets” in Check

Speaking of dividend-paying stocks, I’m a tremendous fan of income investing. In my eyes, there’s no better way to quicken the growth of your portfolio than by reinvesting dividends that your payers (including bonds) spin-off. It’s a way to compound your investment accounts’ overall growth.

Income investing may sound complicated, but I’ve found a way to break it down into an accessible analogy. It’s called the “Bucket System.”

In our illustration, you have four “buckets”: Your Cash, Income, Growth, and Alternative buckets. Each is distinct but equally important for income investing, though they may not (and probably won’t be) allocated the same. When I talk about the annual yield below, I’m referring to the cash flow from the group of investments in that bucket. Of course, your total return will be strongly influenced by the price fluctuations of the underlying assets in the bucket.

The Cash Bucket is designed to be your emergency fund – the money that lets you rest well at night. Primarily in savings, expect the yield from your cash bucket to hover around zero.

The Income Bucket is where your investments in different types of bonds live. Think Treasury, municipal, corporate, international, floating-rate, and high-yield. The bonds you’re invested in can range from less risk (Treasury) to more risk (high-yield) with returns that will vary in kind. Keeping a blend of bonds is prudent to maximize your yield while maintaining a degree of protection of your principal. The annual yield depending on your mix should fall in the 1% to 6% range.

The Growth Bucket is, in my opinion, the meat-and-potatoes bucket. Here you’ll reap the rewards of “capital appreciation” through your ownership in fast-growing companies, like Amazon, which currently aren’t offering dividends.

But, since we’re talking income investing, you’ll want the majority of your Growth Bucket stocks also to pay a juicy dividend. Stocks like this are often found in telecommunications, consumer staples, utilities, and healthcare. Some established tech companies and energy outfits provide both growth and income. These companies stand to offer a win-win! This bucket often has yields in the 2% to 5% range.

The Alternative Bucket is where your assets that aren’t traditional stocks or bonds fall. Examples include master limited partnerships (MLPs), real estate investment trusts (REITs), preferred stocks, and closed-end funds. This bucket comes with higher levels of risk and has the potential to provide higher current income than stocks and bonds. I consider this your overall portfolio yield-enhancer, as you could see yields ranging from 3% to 8% from this bucket.

And that’s it! Easy, right? Just be mindful to keep an eye on your buckets’ performances. And, you may want to make adjustments as life and your financial goals change (i.e., your Risk Tolerance).

Your Retirement Lifestyle

Have you done any lifestyle planning? This is the butter for the bread of your happy retirement – the stuff that makes your post-career life personally rich. I believe this item is the most important on our list.

A healthy and happy retirement lifestyle all boils down to core pursuits – you gotta have ‘em. These are the passion points of your life; these are activities you love to do and engage in often.

There is no definitive list of core pursuits. The sky is the limit on how you can choose to spend your retirement. From my research, in which I surveyed thousands of retirees to see what makes them happy, the most popular core pursuits involved other people, including group sports and social circles. Solo endeavors were also important. What’s more, the happiest retirees had an average of 3.6 core pursuits. They are that important, folks.

Examples of “social sports” include golf, tennis, pickleball, yoga, and walking/running/hiking with friends. For other group activities, there are the obvious ones like travel, church, and spending time with the grandkids, and more creative ones like dinner murder mystery clubs and wine tasting circles. As for individual activities, you may choose gardening, reading, birdwatching, scrapbooking, or woodworking.

The most popular core pursuit among happy retirees is volunteering. It makes sense. There’s a symbiotic relationship there – you do good to help others, and that in turn makes you feel good. I encourage all my clients (and family and friends) to find a cause you’re passionate about and get involved. It will only make you happy.

Several months ago, I conducted an office survey. I wanted to get a taste of just how many core pursuits are out there. In Capital Investment Advisors’ office alone, we identified over 100 different core pursuits of our staff. Wow!

Now, here’s the thing. You don’t need to wait until retirement to figure out your core pursuits. You should get started right away! Trying out new things to see what sparks your interest is something you should be doing in your 30s, 40s, and 50s. At the very least, begin exploring your passion pieces when you’re about ten years out from retirement. That way, you have you’re “super hobbies” established and have a sense of how you’ll spend your Golden Years.

So, are you tracking for a “rich” retirement? Consider the elements above and give yourself a grade for each. Pass with flying colors? Fantastic! Need a little extra work in some of the areas? There’s no time like the present. With just some tweaking and attention, anyone, and I mean anyone, can make their way to a happy retirement. It just takes planning, implementing your individual strategy, and then sitting back to enjoy the fruits of your labor in the ways that bring you the most happiness.

Looking for some new hobbies to try? Take our Core Pursuit Quiz!

This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved.  There will be periods of performance fluctuations, including periods of negative returns and periods where dividends will not be paid.  Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.  Investment decisions should not be made solely based on information contained in this article. The information contained in the article is strictly an opinion and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

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