Retirement is the goal for any working person. But that goal seems to be growing more and more elusive. A lot of us wonder if there is contrarian opinion, so to speak, to the traditional advice about planning and saving for “The Golden Years.”
Before you even think about collecting that gold watch from your employer, you need to figure out where your retirement income will come from. It may mean working longer, but smarter. Take a look at the following, alternative ways to save for retirement.
Supplement your income
Working longer doesn’t have to mean you go on grinding away forever at something you hate. Older workers can look to any number of part-time, contract and temporary jobs available these days. How easy it is to find those jobs — and how much you’re paid — depends on your skills and the demand in your local market. You may have to accept less than what you earned at the peak of your career, but even a modest retirement wage can have a substantial financial impact.
If you don’t like the idea of working longer, you’ll need to ramp up your savings. That takes discipline, but even if you’ve saved little by your late 40s or early 50s, you have enormous potential to save, if your mortgage is gone and your children are financially self-sufficient. The idea is to redirect into savings the money that used to go to your mortgage and kids.
Options to get rid of debt
Carrying debt into retirement was once considered dangerous and irresponsible. But today’s low interest rates have changed the game — if you borrow smart. Make sure you finance your debt at better rates than you have in the past. And make sure your debt payments are much lower than your capacity to cover them.
You can take advantage of today’s low rates to position yourself for your later years. You can refinance the mortgage you got when interest rates were one or two percentage points higher than today. On a $200,000 mortgage, that’s about $2,000 to $4,000 in annual savings you can use to make extra mortgage payments or, if necessary, pay off other debts. If you have high-interest credit card debt, you can tap your home equity for a consolidation loan at much lower rates.
Just remember that your main goal is getting rid of that consumer debt, not just making it more manageable. As you approach retirement it’s critical to only borrow for productive purposes like buying a home or other appreciating asset. Today’s low rates could make the difference in owning something you couldn’t otherwise afford.
Boost your income with dividends
While fixed-income investments can protect your savings, you’re not likely to increase your wealth. To stay ahead of inflation, you’ll need to keep a significant part of your portfolio in equities, and focusing on dividend-paying stocks may provide the right balance of risk and reward.
Picking the right dividend stocks is key. Avoid companies with the highest yields, because that may indicate the dividend is likely to be cut, and the stock price will suffer as a result. Instead, choose reliable dividend payers that can maintain those dividends even in bad times, while also building them consistently over time. Look for well-managed, profitable companies in stable industries with good balance sheets and modest growth. (Here’s how Warren Buffet does it.) They should also pay out only a reasonable proportion of profits.
Look to annuities for a safety net
Annuities are suitable for many middle-class retirees but aren’t for everyone. They can be complex and come in multiple forms, so you will need to do your homework carefully before buying. How much savings you ultimately convert to annuities is up to you.
Some retirees like to have a combination of annuities and government benefits like Social Security to cover their basic spending. That way, if your investment portfolio suffers a big setback, your basic lifestyle is still assured.
‘Financial freedom ratio’
If you’re trying to monitor and measure how you are progressing toward your retirement, you should compute what an investment advisor refers to as your “financial freedom ratio.” All you need to do is divide the total value of all your assets by your annual expenses. When you do this, the number to reach in your financial freedom number ratio is anything over 25.
First, add up the total value of your assets. These will include:
Any business income you earn
Any real estate investment income you earn
Exchange traded funds (ETFs)
Potential pension income
Potential Social Security income
Then add up the total value of your expenses and debts. If you’re debt free or nearly debt free, you’ll still want to factor all costs into your expenses, including any sort of hobbies, memberships, annual vacations, etc., that will continue beyond retirement. This total represents your post-retirement expenses.
Here is an example
If your assets are $900,000 and your annual expenses are $30,000, that would translate into a financial freedom ratio of 30 by use of the following formula:
$900,000 (total assets) / $30,000 (annual expenses) = a financial freedom ratio of 30.
A ratio of 30 means you’re in pretty good position to retire (as long as you don’t allow annual expenses to balloon post-retirement, of course).
It’s important to keep in mind that you should never spend more than four percent of your portfolio, annually. That way, you can potentially make your retirement savings last for decades.
The path to financial independence and a happy retirement isn’t easy. But, if you stay dedicated to your goals, add these elements of an alternative retirement plan to the traditional advice on retirement planning, and steadily track your progress, you’ll achieve your own version of “The Golden Years”.