When people think about retirement, they often plan to shift investments, and that’s certainly important. But according to Lamont Stewart, MBA, and Financial Advisor with Cetera Advisors, people need to look at the whole picture of income and expenditures and re-examine their most cherished beliefs about retirement.
“I ask if they really want to retire now,” Stewart said, advising to think of a 30-year retirement. If you do want to retire or circumstances force you to, there may be income options.
“Most people just flip the switch and put in that (Social Security) application. If you have other sources of income and can live within that income, try that. Can you live on your pension, or a spouse’s benefits for awhile? You need to see Social Security as an investment that compounds eight percent every year that you delay application (until the maximum application age of 70).”
People often imagine spending cuts in early retirement, like fewer work clothes and no commute, but Stewart cautions that in the first years of retirement, spending may increase by five percent. New retirees may travel more or buy second homes, or simply have more leisure time to spend on recreation. After the first few years, recreational spending may decrease, but spending on health care premiums and medicine will likely increase.
Consider downsizing your living space and expenses, Stewart said. “Downsizing to a smaller living space can free up homeowner equity that isn’t doing anything for you right now.”
According to Stewart, holding onto property “for the kids” may be premature. Often, by the time their parents die, children may have moved away and have no interest in the real estate. “Nine out of 10 times, the kids don’t want it, and may dispose of it at a lower price in order to liquidate and get it off their hands.”
If you are invested largely in big growth investments, such as the stock market, you should consider diversifying. Big growth means the risk of big losses. “Most folks don’t have the luxury of time at that point. In the last downturn, it took seven to eight years to break even. You don’t want to get on that train,” Stewart said.
An easy way to diversity is by investing in broad market index funds, which allow you to invest in a mix of investment items without buying many separate investments. (For more information, see investopedia.com/terms/b/broad-basedindex.asp.) Stewart says, “ It’s like buying pizza by the slice. (You have) Instant diversification and it’s easy to liquefy if you need to.”
He adds that there should be some investments that provide a steady stream of income, and others that provide more growth. Each individual needs to come up with their own mix of investments to both bring in a steady income as well as some growth investments to counter inflation.
All this suggests the need for self education. To begin, you might want to try Investopedia’s education page (www.investopedia.com) or the FINRA Foundation’s online document on retirement savings (www.finra.org/investors/retirement) to learn more about your retirement income choices.