Retirement is a beautiful word we all enjoy thinking and talking about. Retirement is a time when we’re finally able to break free from the 9 to 5 hustle and are able to spend our time the way we want, even if that’s waking up every day and doing nothing. Although, many of us never do the proper planning for retirement in the form of retirement income. Proper retirement planning is the difference between a nice and pleasant retirement and a financially stressful retirement.
So, have you done the proper planning for your retirement? How much will you be able to spend every year from your nest egg without going broke?
When we mention “nest egg” we’re referring to your portfolio, whatever your portfolio may consist of. Whether it consist of stocks, bonds, index funds, managed mutual funds, or certificates of deposit. You should plan for how much money you’ll spend every year, to help ensure your money lasts throughout your lifetime.
Some people will only need the money they’ll receive from social security and their pensions. However, the majority of us will need more than that to pay bills and live the lifestyle we want, which will need to be supplemented with our savings.
Traditionally, the savings withdrawal rate is 4 percent from your savings in the first year of retirement, and then increases each year based on inflation.
Proper retirement planning says your money should last a minimum of 30 years. If you’re well off and have excellent savings and investments you can start withdrawing as much as 4.5 percent from your portfolio right away.
By using the 4 percent and 4.5 percent withdrawal rate you’ll be able to enjoy retirement and not have to worry. Doing this however, requires doing the proper retirement planning, proper retirement planning means you have the proper investments — the proper investments include stocks, which can be a touchy subject for some people.
You can still withdraw 4 percent annually with only 35 percent of your portfolio being invested in stocks. If stocks scare you, you can leave stocks out of your portfolio completely, but then your withdrawal rate drops to around 2.5 percent annually.
The 4 percent and 4.5 percent withdrawal rate can at times be “too safe” of a withdrawal rate. Those who have had excellent portfolios and use these withdrawal rates, have ended up with the same amount of money they started out with 30 years later.
The Bucket System
After you’ve decided on a withdrawal rate you’re comfortable with, you’ll need a system to manage and keep your portfolio organized. An old fashion and time proven way of doing this is by using the bucket system.
The bucket system works by putting a certain amount of money into separate buckets, with each bucket representing a separate allocation and purpose. One bucket could represent stocks for growth, another bonds for fixed income, and another one for cash.
The cash bucket is used to fall back on when the market goes belly up, or in other words — a “safety net”. When everything else goes bad, your cash bucket should be able to cover your basic living expenses.
You should figure out an amount of money to keep in your cash bucket, and there should be enough cash in it to cover at least three years’ worth of expenses. Then you should decide on how much money will go into your stock bucket and bond bucket.
The amount of money you invest into your stock bucket is up to you to decide and should be based on your personal risk tolerance. Many people are scared of stocks, but the best portfolios normally consist of a least 40 to 65 percent stocks. The remainder of your money goes into your bond bucket (what’s not already in your cash and stock buckets).