The Retirement Corporation of America

How To Shockproof Your Retirement Plan

You always want to hope for the best, but prepare for the worst, in whatever financial plans you make. That certainly is true of retirement planning—you will have to live for many years on whatever you've saved.

If you take early retirement and don't work afterwards, you could easily spend more than 30 years having to live off your retirement plans and nest egg. That's why building up your retirement savings is so critical—even if it means getting by on less when you are working, so you can save more.

•  Rule #1 of Sound Retirement Planning: The more you save over the years, the less likely your retirement plan will go off the rails. What you save will have to sustain you for as much as one-third of your life. Make sure you are saving enough that you never risk outliving your money.

It also is why creating a retirement budget—and watching over it, year after year, is so critical to your long-term retirement well-being. Plan your retirement spending so it is in line with what you can realistically expect to earn. Keep a very close eye on your budget after you retire to make sure your original projections were accurate.

•  Rule #2 of Sound Retirement Planning: Build a budget that you can afford in retirement. That calls for careful planning before, and careful monitoring after, you retire.

Expect the unexpected in retirement, and be prepared to deal with anything and everything that might go wrong. You will spend a long time in retirement. Anything can happen to the economy and the financial markets over those years. You will be aging and, eventually, your health is bound to deteriorate. Most importantly, your ability to work and add to your retirement savings will diminish. You are most likely to run into trouble in the later years of retirement when your ability to hold down any kind of job—even part time—will be virtually nil.

•  Rule #3 of Sound Retirement Planning: Try to anticipate everything that might go wrong in retirement and plan for it. Here, we'll just cover the main points to start you thinking.

Ten Tips for Shockproofing Your Retirement Plan

Trouble can come from any direction. All you can do is anticipate the most common perils and defend against them as best you can. Follow these 10 tips and you will have safeguarded yourself against most of the things that could go wrong.

•  Tip #1: Keep income flowing in as long as possible. Try to resist taking early retirement, because you will pay a financial price for it the rest of your life. Prepare for post-retirement work early enough to make yourself marketable. The longer you have money coming in, the longer you can go before having to dip into your retirement nest egg.

•  Tip #2: Remain a growth investor all of your life. You will want to reduce your investment risk as you age—meaning you'll want to emphasize income more and growth less. But keep investing some of your money for growth. That's your best chance of making sure your money outlives you, and that your investments keep you ahead of inflation.

•  Tip #3: Live where you can afford to live. This takes a lot of thought. Before sentiment keeps you in the family home for the rest of your life, think through what it will cost you to live there and whether you couldn't find someplace less expensive. Someplace in a warm climate might be cheaper—but not if you're always flying North to visit the kids, or paying for their visits to see you. Think through all the costs involved. Opt for the place that will cost the least overall.

•  Tip #4: Keep what you have. You will be tempted to spend money on kids and grandkids. Furthermore, the younger generation might look to you as a source of financing. Resist the temptation to give it all away. The point can't be made too often that, by doing so, you increase the risk of outliving your money. Another point is that your kids and grandkids can borrow for college and for buying a home. You can't borrow to pay for your retirement.
•  Tip #5: Don't treat your retirement nest egg as a windfall. There is a temptation to make up for lost time—spending it on luxurious living and fancy vacations. Your nest egg isn't a windfall. It is the money you need to finance the rest of your life. When it is gone, it is gone—and then what will you do?

•  Tip #6: Keep as healthy as you can. That means regular checkups and taking care of yourself mentally and physically. It's easier to sleep-in when you are 70 than to get out and do an hour of brisk walking. But the more you keep fit, the longer you will stay healthy—and the less the risk of your nest egg being nibbled away by big doctor bills. If you can't face up to a morning walk by yourself, buy a big dog that needs some vigorous walking every day.

•  Tip #7: Own enough of the right kinds of insurance. Your need for life insurance dwindles as you age. However, you need to add supplemental health insurance to cover the gaps in Medicare. Also, you still need enough auto, homeowner's, and liability insurance to protect yourself against big losses. The older you are, the more likely you are to need outsiders to help with chores around the house. Each outside worker you bring in is another person who could be injured on your property and sue you. Also, your friends are likely to be older—thus more likely to fall and sustain an injury.

•  Tip #8: Shop for long-term care insurance. That's the insurance that pays nursing home bills. The younger you are when you buy it, the less it costs. Shop carefully for this type of coverage. Make sure you know exactly how much coverage you are buying. Buy from a company that you know and trust.

•  Tip #9: Make sure you're not over-withdrawing from retirement savings plans. Again, the money in those plans must last you the rest of your life. Don't assume you can keep "dipping" without limit. Each withdrawal reduces the income-generating balance left in the plan—meaning you'll be able to withdraw less next year and less the year after. Assume that the most you can withdraw from any plan is 6 percent of its value each year. Some years, your investment performance will be such that your balance will go up despite the money withdrawn. But all markets ebb and flow. Next year, you might find your 6 percent withdrawals further diminishing a plan balance that already has been reduced by investment market reverses.

•  Tip #10: Review your retirement budget at least once a year. Is your spending in line with your budget? Is your income in line with expectations? Reviewing your budget once a year makes it likely you will spot trouble in the making—you're spending too much or earning too little—early enough to make corrections before the trouble becomes chronic and serious. Anticipating trouble in time to do something about it, is the very essence of shockproofing your retirement plan.