Do this and you'll have everything covered.
For many, the prospect of spending your entire career trying to save and invest well enough to build a viable retirement nest egg seems like an unattainable task. Yet even after you successfully accumulate enough wealth to retire comfortably, you can't give up -- because even more difficult work still lies ahead.
Keeping cash coming in
No matter how your investments are performing, there's one thing you can count on in retirement: you'll have expenses month in and month out, and you need to figure out how to pay them. Although you'll likely have some sort of state pension and may also have additional supplemental income like an annuity helping you to make ends meet, you'll probably need to get at least part of your spending money from your investment portfolio.
Yet retirees face a huge dilemma. With life expectancies much longer than they were decades ago, you have to plan for what may be a much longer retirement period that will require a larger amount of savings.
Moreover, even if you gather a healthy amount of assets as you begin retirement, you need to take steps to safeguard those assets from the impact of inflation. But the best way to get that purchasing-power protection is by investing in shares -- and that carries its own risks.
The perils of market timing
The main problem with relying on shares to finance your retirement is that you may have to sell them at exactly the wrong time. If you happen to need cash when the market is hitting a low point, then you'll end up selling low. For instance, consider these shares:
As you can see, all of those shares had an impressive return in 2009. But if you were stuck selling shares around this time last year, you would have taken a huge hit. And if you had only been able to hang on without selling, you would have made back all your losses on those stocks and then some.
Give yourself a cushion
The key to gaining the flexibility to cover all your bases during retirement is to build a cash cushion. By doing the following, you can ensure you'll have the cash you need when you need it.
Even more importantly, you can replenish your reserves on your own schedule, waiting for the right time to sell based on market conditions.
- Set aside some money -- the amount depends on how long you think you might need to wait out a down market, but saving somewhere between two and five years' worth of expenses in a savings account will let you call the shots when it comes to selling off your investments.
- Think income -- in addition to having a cash reserve, making income generation an important aspect of your investing strategy is important. Although a cash cushion can give you the latitude to invest in riskier shares, you should also have some of your money in dividend-paying investments as well.
- Get a good mix -- it's especially useful to have several different types of investments in your portfolio, particularly ones that won't move in lockstep with each other. For instance, if your bonds rise when your shares fall and vice versa, then you can look to whichever investment performs better to sell and replenish your cash supply.
Above all, remember that your primary goal during retirement is a lot different than it was when you were still working. Although getting some growth is useful, it's far more important to preserve your capital whenever possible -- because the odds are good that you won't be getting any more of it.
Don't quit on it
As daunting as managing your life savings can seem, it doesn't have to be difficult. If you just keep those key points in mind, then you can give yourself the protection you need to get through whatever the financial markets throw at you.
More on the economy and the markets:
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> A version of this article was published originally on Fool.com. It has been updated by Bruce Jackson
