7 Steps to Creating a Risk-Free Retirement Plan
When it comes to saving for retirement, setting goals can be difficult. Just how much should you save? How should you invest those savings? When should you start drawing down on your retirement savings? And just how long will that money last?
The last of these questions is, perhaps, the most important. When we talk about planning for retirement, we are really talking about mitigating risk. The more money you save, of course, the less likely it is that you’ll run out of money.
Unfortunately, it’s not possible to create an entirely risk-free life. Just like it’s not possible to plan a completely risk-free car ride to the grocery store. Life just comes with risks. With that said, it is possible to mitigate risk in retirement so that you can live relatively worry-free–at least when it comes to your money.
Here are 6 steps to help you lower your retirement risks so that you can relax and enjoy your golden years.
1. Set Two Goals for Your Risk-Free Retirement Plan
When we talk about setting goals for retirement, we often talk as if we’re just setting one goal. This is the nest-egg amount you plan to have saved before you retire. Or it’s the percentage of your income you plan to save every year until you retire.
But this misses an important element of personal finance: the ability to adapt.
If you have less money during retirement, to a point, you can get by. You’ll figure out where to move, how to save, or how to keep side hustling so that you have enough to keep soul and body together. Sure, it might be more comfortable to get 80% of your pre-retirement income each year, But could you actually live on 60%?
As you’re setting retirement goals, set two. One is your must-have goal. This is the amount of money you’ll need each year to meet your basic needs. Then you can set your reach goal. This is what you’d like to draw down each year so that you can really enjoy your retirement.
The lower-end goal isn’t your dream retirement. And if you work at it, you can likely come out ahead of that goal. But that first goal is the one you fund first. And you can invest in a particular way to ensure that minimum standard of living.
2. Invest a Portion in TIPS
So how much do you need to meet those most basic needs? Once you’ve calculated that, run some calculations for how much you’d need to invest in TIPS–Treasury Inflation Protected Securities–to meet just that goal. Sure, TIPS aren’t going to earn you any fabulous interest. But they’ll beat inflation and they’re as risk-free as it gets.
It can still be difficult to run these calculations. How many years do you need to meet this minimum standard? How much can you expect to earn over a long time with TIPS? This retirement calculator might be helpful in figuring out the answers to these questions.
The bottom line, though, is that you can save a lot of money in TIPS, and that money is virtually guaranteed to stay safe, regardless of what the market or inflation does. If you want a risk-free retirement, funding it in this way lays the foundation for that to happen.
3. Invest the Rest in Riskier Options
What should you do when you reach your TIPS investment goal? Once you’re there, you can invest the rest of your money in riskier options. How much you risk will depend on your personal risk tolerance. If you want to take a real chance–knowing you have your retirement basics covered–you can invest the money in some wild startup that could go boom or go bust. Or you can take a more conservative approach by investing in a balanced stock market portfolio.
Either way, taking on more risk is more likely to come with some rewards. And if you invest conservatively in the stock market, you’re less likely to lose it all. And you may just come out well ahead of the game with plenty of money to ramp up your retirement lifestyle.
4. Retire at the Right Time and the Right Way
If you can retire when your assets are at a peak, that’s a good option. But the problem is that you never know when that peak is going to turn into a valley. So keep an eye on the market and your portfolio, and do your best to retire at the right time.
With that said, you may also want to consider an alternative like partial retirement. Working part-time on the side can help you have more leisure time to enjoy while leaving more of your assets in place to continue growing. Each year you continue working, even if it’s only a few hours per week, mitigates the risk of running out of money in retirement even more.
5. Save, Save, Save
The biggest problem with this plan is that it requires a lot of money in savings. To invest enough in TIPS to fund 15 years or more of retirement–that’s a good chunk of change. So if this is the type of risk-free retirement you want, you’ll need to ramp up the retirement advice the experts give for the “normal” retirement plan.
Most expert advice is predicated on the fact that you’ll retire around 65 having invested most of your money well in a combination of investments yielding around 6% to 8%. If you want to invest in TIPS instead because of their level of security, you’ll have to save a lot more.
So you’ll want to start saving for retirement in your 20s, if at all possible, or get started in your 30s if you’re still paying off student debt. Save as much as you can, but also focus on getting and staying debt free and building an emergency fund.
In your 40s, you’ll need to sock back well over 10% of your income. Some estimate that with a lower-interest investment plan, you’ll need to save upwards of a third of your income in your 40s. During this time, you’ll also want to make sure you’re debt-free and that you’re dealing with healthcare expenses and planning for how to cover your healthcare as you age.
In your 50s, you’ll still need to be saving as much as you can, and working to maintain your retirement. If you decide to invest in the market earlier in your investing life, you might start to pull back those investments into safer options like TIPS at this point.
6. Know Your Limits
Truly risk-free or very low-risk retirement plans are easiest for the super-wealthy to achieve. When you have several million dollars saved, you could invest it all in TIPS and live off of a tiny percentage of your total assets. But if you’re in the middle class, saving the amount of money you’d need to have this plan could be out of the question.
With that said, it’s a good idea to think through what a risk-free retirement would look like for you. This type of planning can give you insight into ways that you can mitigate risk while still following more conventional investment advice and investing in a mixed portfolio.
As with everything else in life, retirement will almost never be completely risk free. But that doesn’t mean you can’t make choices that help reduce your overall retirement risks so that you can rest easier during your retirement years.
7. Use Planning Tools
There is a wide variety of online and offline retirement planning tools that will get all your retirement funds together. We have tried most of them and found them good and helpful. Though we have to note one of those tools as our favorite – Empower Retirement Tools. Empower features sophisticated, yet simple and intuitive tools that will assist you in building a retirement plan (even a risk-free retirement plan). Read our extensive Empower review and find out all about this terrific tool that can enhance your retirement planning.
(Personal Capital is now Empower)