Your Money

YOUR MONEY: Try to retire your debts before reaching retirement

Certified financial plannerJuly 27, 2013 

The prospect of retirement is exciting. People daydream about a life of leisure, fulfillment and what it will feel like to live life according to their schedule. Perhaps one of the uncertainties of retirement that causes the most anxiety for current and soon-to-be retirees alike is how to make the money last for the rest of their lives.

For years, retirees have been advised to take a more conservative approach to investing as they near and enter retirement. While there is merit to this advice, being overly conservative can be as detrimental to your retirement savings as being too aggressive.

Therefore, as retirees, it is important to understand all of your risks and make decisions early and periodically in an effort to minimize those concerns.

Retirees tend to err on the side of caution with their investments, hoping to preserve what they saved during their lifetime. However, I challenge you to shift your perspective when it comes to retirement planning. When making the decision about how to invest your retirement assets, ask yourself an important question: What exactly am I trying to preserve?

Some people operate in preservation mode because they desire to leave an inheritance for their children. Others, however, need that money to supplement their pension and social security income. If you depend on the money for retirement income, then your goal is bigger than just preserving assets. It also includes preserving your ability to continue to buy the things you need during each year of retirement, regardless of how much the price of those items may increase.

One effective way to keep up with rising prices is to invest a portion of your money in investments expected to grow over time.

Stocks: Yes, stocks come with their share of risks and volatility; but over time, they tend to outpace inflation. What that means to you is that you have a better chance of buying the things you need five, 10, and 20 years into retirement.

Bonds, etc.: Investments like bonds and CDs, however, have their share of risks that are often ignored. The primary risk being that periods of low interest rates, like today, create a pay cut to many retirees who depend on the interest for income.

It is imperative for retirees to find the right balance between preserving what you worked to build and preserving your ability to keep up with rising prices for the rest of your life. Ignoring either objective can negatively impact your success in reaching your retirement goals.

In addition to being conservative with your investments, you should consider ways to be conservative with your spending, as well. Those approaching retirement have an advantage over current retirees. During the last few years in the workforce, it makes sense to aggressively eliminate your debts.

Aside from the fact that doing so reduces the amount of income you need to operate your household, it has another key advantage: flexibility. If you live as long as you envision in retirement, there is a high probability that you will see your retirement investments go down in value, especially if you are invested in stocks or mutual funds. Consequently, you may have to adjust the amount of income that you withdraw from your accounts so that you do not accelerate its depletion.

Adjusting to a reduced income during retirement can be challenging, especially if your budget is already tight. However, adjusting the amount that you spend in areas like travel or hobbies is easier than if you carried a mortgage and credit card balances. Retiring your debts before you retire provides flexibility so that lean years only require you to compromise on your wants instead of sacrificing to meet your needs.

Life is a journey. Plan for it.

Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.

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