We’re finally closing out this near retirement series. We saw what the so called experts recommended for the 10 years, 5 years, and 1 year before retirement. Now let’s see what they have to say about where you should be after retirement. I retired from a corporate career six months ago so I should be able to make a direct comparison here.
Money Magazine: Saving target is 12x household income when you retire at 65.
As I said in previous posts, I think it’s better to use your expense as a measuring stick. The target at retirement should be 25 x expenses. That way you can draw down at the 4% “safe” withdrawal rate. Before I quit my corporate job, we did not have 12x of our household income saved. Now that I’m self employed and making a lot less money, our net worth is more than 12x our household income. That’s why I don’t like using income as a benchmark. Income can fluctuate a lot especially if you’re self employed.
It’s better to use expense as the measuring stick. Before I quit my job, our net worth was a little above 25 x our annual expense. This gave me the confidence to quit and go it alone.
Don’t Go Chasing Yield
Money Magazine: The goal isn’t to maximize income, but to maximize capital preservation – by diversification. Every couple of years, trim a few percentage points from your stock holdings and stick the money in bonds and cash.
This really doesn’t apply to us right now because we are relatively young (almost 40) and we still have 20 years left before full retirement. It is very tempting to buy high yield stocks to maximize income when you’re not working full time anymore. I can now see why a retiree would want more yield. At this point, I’m planning to stay invested in the stock market and hold 10-20% in bonds. I’m converting my after tax stock portfolio into a dividend income portfolio. This will give me the flexibility to use that income or reinvest it.
Do A Yearly Spending Checkup
Money Magazine: Before you quit work, you gave yourself a budget. Expect to blow it. Track your spending once annually to keep yourself honest. Chronically going over a 4% inflation adjusted draw could cause your money to run out.
We have gone over budget once in the six months since I retired. It was due to a big repair bill on the rentals. Overall, we have kept our budget intact. I think going over 4% is a terrible idea and everyone should aim to spend less than that. It’s better to start living with your retirement budget a couple of years before the actual retirement date. That way you can fine tune your budget and see if it will really work.
Take From All Baskets
Money Magazine: Try to stay in the lower tax bracket by withdrawing from all accounts including taxable, 401(k), IRA, and Roth.
I think this is a good idea. We will be in a lower tax bracket in 2013, but I haven’t really looked much into it. Right now, we are drawing income from our after tax account (dividend), P2P lending account (interest), and rental properties (earned income.) All of this income goes into a general account and if we have a surplus at the end of the month, they will be earmarked for more dividend stocks and Roth IRA. We won’t withdraw from our retirement accounts until we’re fully retired.
Never Retire Your Resume
Money Magazine: Keep in mind that a worst-case scenario may necessitate your returning to work. Update your resume once a year even if it’s volunteer work or leadership in a social club.
This is probably a good idea, but I’m not going to follow it. I’ll update my resume when I really need to get a job. As of now, I am not planning to work for anyone else again. I love self employment and even if my online business doesn’t work out, I will try something else. Once baby RB40 goes off to kindergarten in a couple of years, I’ll have a lot more time to try other ideas. It was nice to have a regular paycheck, but I found that I’m an entrepreneur at heart and I don’t want to work for anyone else.
Sticking to your budget is probably the most important thing after retirement. If you can stick to your budget and keep the withdrawal rate below 4%, it should be smooth sailing for many years. One alternative that I champion is to work part time after retirement. This will help put off withdrawal and give your portfolio a chance to grow.
Whew, that was a long series. Check out the previous articles if you’re not retired yet.