Friday, July 23, 2010

Retirement Finances - What worked and what did not

Managing finances in retirement is a new experience that has been challenging given the economic crisis of the past few years. For now, we're able to stay in retirement, which I attribute to some actions we took. On the other hand, there are some actions that have not helped much. Here's my summary of what has worked and what didn't.

Here are the financial elements that worked for us:
  • Having zero debt. When we retired in October, 2007, our only debt was a mortgage. We did not have any credit card balance, car or other loan that required a regular monthly interest payment. In May, 2009, we paid off our mortgage, making us completely debt free. Having no debt has made it easier for us to reduce expenses during the economic recession.

  • Keeping short term funds in cash or equivalents. We had about 3-5 years of funds for living expenses in cash, CDs and bonds when the market started declining. This has provide us with the confidence to stay in retirement, even during the recession.

  • Initially having more funds than needed. When we retired, we had at least 25% more savings than needed to fund a successful retirement. I never expected to use that margin of safety. Unfortunately, the stock market decline has reduced our savings by 33%, which has made staying in retirement a bit more challenging.
  • Here are the financial elements that did not work for us:
  • Counting on average annual stock market returns. Our retirement income projects were based on 7% average annual returns. We didn't expect the negative -37% returns of 2008 to occur. Perhaps, we'll get back to 7% in the near future, but unfortunately some damage to our savings has already been done.

  • Working to increase probability of staying in retirement. While working has covered some living expenses and reduced our withdrawal rate, it's effect on retirement success is much less than those of investment returns. For example, part time work at best may cover 25-30% of our annual expenses. Our savings have fluctuated by 100%-300% of our annual expenses on a quarterly basis.
  • Going forward, our focus will be on managing our spending, maintaining a "no risk" 3-5 year living expenses fund, minimizing part time work, and increasing investment returns.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

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