Can You Do The 2-Step?
Wealth accumulation and wealth preservation are both equally important to your retirement. Each step is accomplished a different times throughout your life. If you are in your working years, start at Step #1. If you are nearing retirement skip to Step #2.
Tip #1 – Building Wealth
Your Window of Opportunity
You will be working for about 40 years. You will be retired for about 30 years. How you manage your money during your 40 working years will determine what kind of retirement you will have. If you accumulated enough money you get to spend your retirement years retired, if not, you get to continue working.
The Basics|Your Needs
You only have so much disposable income to pay for your basic living expenses. You basics or needs would include your mortgage, food bills, transportation, insurances and utilities. You have to spend money on the basics, you cannot get around that. But you can find ways to cut back.
If your mortgage interest rate is too high, refinance. Stock up on items when they go on sale. Join a discount shopping club. Eat less or buy food items only when they go on sale. For example if pork and chicken are on sale this week plan your meal menu around that; if next week beef and fish are on sale plan around that. Use public transportation if it’s available. Trim your utility bills by wearing a sweater vs cranking the heat up in the winter.
The Extras|Your Wants
Your financial willpower determines how you spend the money that’s leftover after basic expenses are met. Do you spend excess money on your wants or do you invest your extra money?
If you are serious about building enough wealth to last 30 retirement years you may need to tighten up your spending habits.
You either pay now or pay later. You either enjoy luxurious vacations, high entertainment and frills now while you are working or you eliminate those expenses and save that money for retirement. You decide.
Tip #2 – Preserving Wealth
Protecting your wealth is just as critical as accumulating it. How you approach
Your investment strategy will determine whether you outlive your retirement income or not. Once you are retired you want to stay retired and not be forced to return to work.
A good financial practice is to avoid putting all of your money into one type of investment. Your portfolio will handle the ups and downs of the market better when your investments are spread around.
You should properly allocate your investments between your stocks, bonds and cash accounts. To have a good mix does not mean you must invest in risky investments. You can invest in low risk, no-load mutual funds and still be diversified.
You can preserve your wealth by controlling your risk. In retirement, you may lean heavily towards low risk investments and that’s okay. Your rate of return may not be that much but you will not risk the loss of your principal either. Preserving wealth means just that, preservation; and sometimes that does not include growth.
Stay on Target
You should rebalance your investments at least once a year. Some investors rebalance when their allocation mix moves away from their pre-set allocation target. Choose what works best for you, just make sure you do rebalance in some way.
The most critical part of wealth distribution when you retire is the Required Minimum Distribution. If you miss the distribution date or calculate your distribution amount incorrectly you will pay heavily. The IRS charges you 50% of the amount that was not withdrawn.
According to the IRS you must take your first Required Minimum Distribution the year you turn 70 ½. They allow you to delay this first distribution until April 1st of the year following your 70 ½ birthday. After that you must take distributions by December 31st each year.
What Will Your Retirement Look Like?
Retirement can be fun but it can also turn into a nightmare. You can avoid the retirement from hell by planning properly before you retire and then following good financial practices during your retirement.