Beginner’s Guide to Finance – Approaching Retirement

by Sean Bryant on July 23, 2012

The idea of retirement is one that we hear quite a bit.  However, the concept is still strange to many people.  They think it is always a long ways off.  However, for many it is closer than they may think, in fact retirement for baby boomers is happening now as the oldest of that generation are turning 66, the full retirement age for Social Security.  As a person begins approaching retirement, their needs start to change.  By having a plan in place now, they can make sure retirement does not sneak up on them leaving them scrambling.

Keep Saving

As retirement draws near there is no reason to cut back on savings.  Nobody has ever gotten into retirement and said they saved too much money.  In fact most people are happy to have more than they need for themselves so they can spend money on their loved ones.  All the way up until you stop working, keep putting as much as you can into your retirement plan or SIPP pension scheme, you can always spend it later.

Reallocate

As you get closer to retirement, your risk tolerance will decline.  5 years before you retire you should be the most conservative you have ever been.  This will help preserve as much capital as possible in the event of a market downturn when the time to retire comes.  Maintaining several years’ worth of living expenses in cash will allow the retiree to live without selling low if that downturn does come.  Want to reallocate the easy way?  Use target date funds.  They will automatically move you to a more conservative mix as you approach retirement.

Monitor Expenses

Before you retire you should have a good handle on what your expenses are, and an idea of what they will be in retirement.  After you retire, monitoring expenses and getting a feel for how much money is actually going out for a few years will allow you to know for sure how much you will need each month to live.  Once you are comfortable with your outflow, you can move your portfolio to take on a little more risk.  The cash you have will keep you from selling at a market low; the risk will help grow your portfolio to maintain a steady increase in value.

Expect the Unexpected

People are living longer than ever.   While the average lifespan is still around 80 years old, many are living well past that time.  By planning to live to 100, the individual will make sure he or she has enough to cover expenses.  As one grows older medical expenses will increase, inflation will always be around, houses may need remodeled to accommodate frailer bodies, and care in a nursing facility may be required (have you learned about long term care insurance?).  While government jobs usually provide a safety net, how much is a state pension compared to several years ago?  With municipalities in financial trouble, how much will it be in the future?

Many people do not know when to retire.  While the government tells us we should be working until age 66, there is no set timeline for all people.  Some will never truly retire; others will save more while young and retire early.  When do you want to be in a position to no longer have to work?  Simply plan to accumulate enough money by that time, and as you approach retirement, follow your plan.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • John @ Married (with Debt)

    I am going to try to save just what I need for retirement and not much more, because I don’t believe in leaving anything behind. I feel like I would be someone who might think that I did work too hard and save too much.

  • http://www.mymoneydesign.com/ MyMoneyDesign

    Definitely going to retire early! Its going to take some major planning and strategy, but I think it will be well worth the fight!

  • http://twitter.com/WorkSaveLive WorkSaveLive

    These are some great tips, Sean. It’s even ideal for people to change their allocation within 10 years of retirement (if you have enough assets), but the 5-year thing is a good rule of thumb. I love the “Nobody has ever gotten into retirement and said they saved too much money.” I haven’t run into that situation yet but I’m sure there are a few people out there that could say that.

  • http://www.susies-coupons.com/daily-picks/ Jamie

    The change in average life expectancy is definitely something to keep in mind. It just might not be realistic for us to stop working in our mid 60s if we are going to leave 4 more decades.

  • http://twitter.com/familymoneyblog John Preston

    These days I think health care is the biggest factor to the retirement picture. You really need a large amount of savings and a good plan if you are going to retire before 65.

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