If you want to be happy in retirement, having a million dollar nest egg hardly gets you there.
All over, financial planners advise us to have a certain figure in mind when it comes to retirement. “Based on your current salary, you need $1.2 million by 65″, they might say. But yet, as history has shown, aiming for a numerical dollar amount by a certain age is like driving your car across a railroad track and hoping that you won’t get hit. Even if you reach your goal of $1.2 million by the age of 63, it could drop to $900,000 by 65, but jump back up to $1 million by the age of 66. If you are really trying to follow the advice of having $1.2 million, isn’t that a recipe for a heart attack?
An Easier Way to Think of Retirement
I would also argue that even if you meet the retirement figure, you will try hard not to spend it because seeing a decreasing account balance all the time is hardly comforting.
Therefore, an easier (and care free) way of thinking about retirement is to consider the income you could generate by the time you want to relax. For some, it could be $3,000 a month. For others, it would be $5,000 but you get the idea. As long as you have a similar amount coming in every month, you don’t need to worry about your nest egg at all.
Why It’s Better
Thinking about income early promotes a few additional benefits.
- The Goal More Directly Relates to The Issue at Hand – Instead of guessing a withdrawal percentage, what the market will do tomorrow or whether you need to save 12 or 13 percent of your take home pay, an income eliminates a bunch of assumptions and guesstimates.
- More Predictable – If you have money coming in every month, it’s much easier to spend it as long as you can count on the next payment.
- The Goal is Harder to Reach – Implicitly, generating this income is harder to achieve than getting to a figure where you need principal plus interest to sustain your lifestyle. This promotes more savings, which is ALWAYS a good thing.
- Keeps You Investing – If you start early and is smart enough to reinvest the income that you generate even before retirement, you will reap huge benefits of regular investing and compound interest.
- Less Transaction Fees – When you need to sell your stock or your vacation home to fund your retirement, it usually means paying for the service. If you are focused on income generating assets, then you never have to sell, saving you of all those transaction costs.
What Type of Investments to Look For?
So where can income come from during retirement? Here’s a few areas where you can start looking.
- Rental Property or REITs – While tenants come and go, most landlords who own their rentals outright aren’t really affected much by economic downturns because most tenants still stay in their homes. Another option is REITs because of its high yield.
- Dividend Paying Stocks – Consider owning several dividend paying index funds for your portfolio like SDY or DVY. While the performance can go up and down, the dividend is much more dependable than any individual stock.
- Stable Value Funds – These are only available in 401k plans and the yield is generally quite low, but they generate consistent income month after month.
- Bonds and Bond Funds – If you are buying a bond for income only, you can safely ignore the price fluctuations as long as you buy a safe bond that have a low chance of default. For some added safety and less hassle, you may find that a bond fund (which invests in several bonds on your behalf) would serve you better.
- Social Security – Chances are good that Social Security (or some equivalent) won’t be completely gone when you retire even if you are in your 20s. However small, there will be some benefits by the time you take contributions.
- Part Time – Many people don’t want to think about part time jobs, but it doesn’t have to be a job per say. Many people can earn a little bit of income doing something they enjoy, like making small handcrafts and selling them online for example. Others may be able to offer their expertise as a consultant. When you are working 2 hours a day, I bet you won’t be too stressed out even if you are supposed to be retired.
Start Thinking about Your Retirement Income Now
Don’t just navigate away from this post and do nothing just because you are young and retirement is decades away. The earlier you start, the better your chance of meeting your goal.
Also remember about diversification. Some people will try to build a real estate empire while others will try to learn everything about the stock market. The prudent ones however, will do both.
REITs, bonds, rental properties, dividend paying stocks and more. Why not own them all?
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- E*TRADE IRA - Official Site