While not everyone is ready for retirement, some older Americans are doing well. Discover the common traits among successful retirees.
According to investment firm T. Rowe Price’s survey of more than 2,500 people with 401(k) plans and/or Individual Retirement Accounts (IRAs), the most important factors contributing to their stable retirement are:
Flexible spending habits
Big savings
Income from getting another job
Adapting these three traits for your retirement can give you a more secure future.
1. Be flexible with your spending
Most retirees show flexible spending habits, according to a T. Rowe Price study. Three in five would prefer to adjust their spending up and down depending on the market to preserve the value of their savings and investments rather than maintaining the same level of spending year after year, which could risk shrinking their investment portfolio.
Being willing to be flexible with spending is “absolutely key” before and during retirement, says John R. King, a certified financial planner with Pegasus Financial Solutions, LLC in Austin, Texas.
“Pre-retirement spending is important because the less you spend, the more you save,” he says. “Reducing spending after retirement makes [your money] “It lasts longer.”
To test the impact of spending on retirement income, King often runs a “what-if” scenario. In one case, he increased a couple’s spending by $10,000 a year and made some predictions. Both clients were in their early 50s, so the additional spending began at that time. With this increase, King found that the couple would run out of money at age 93, versus having a $2 million surplus at age 97.
“They were saving a high percentage of the paycheck, but the extra $10,000 in spending reduced their savings rate dramatically,” he says.
Although every case is different, and this may not be a typical result, it shows the impact spending habits can have on retirement savings.
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2. Have adequate savings – Save early and often and catch up if you fall behind
Spending goes hand in hand with saving, because “your spending really determines how much you can save,” says King.
“The three most powerful factors in financial planning are realizing how much you’re spending, realizing that you have to save, too, and the earlier you save, the better,” says certified financial planner Geoffrey Pogue, of Wells. Maine-based Bogue Asset Management. “Everything else seems to fall into line after that.”
T. Rowe Price reports that many retirees with 401(k)s and IRAs have significant savings, with 48% having $500,000 in household assets (investable assets plus home equity, minus debt).
While the amount people need to save for retirement is determined on a case-by-case basis, there are certain things everyone can do to take steps toward creating a stable retirement plan.
Separating your savings accounts can keep retirees on track to ensure their spending patterns don’t interfere with their savings, Pogue says.
Different savings accounts or “buckets” should represent short-term, medium-term, and long-term commitments or goals. For example:
One account holds money for past obligations, including mortgages and other bills.
The second has savings to achieve medium and long-term goals, such as buying a car or taking a vacation. This group includes retirement accounts, such as 401(k) plans.
The third is between 7 and 14 days of cash flow for daily spending on things like gas, groceries, and recreational activities.
“It gets everyone’s ducks in a row,” Pugh says. “It’s much better than just saying: ‘Okay, let’s budget,’ and then at the end of the month saying: ‘Did I win or lose?’
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3. Work – retirement jobs
Sometimes, adjusting spending habits or creating savings plans isn’t enough to get people to a comfortable place in retirement. In these cases, many look to work part-time or even full-time to provide some extra income.
“Retirement does not necessarily mean making a decision to work or not to work; “It’s a decision to work on your own terms,” says Pogue.
Nearly a fifth (21%) of T. Rowe Price survey respondents are retired but have returned to work either part-time or full-time, while 14% are looking for work.
“I think you’re going to see more and more of that because there’s going to be a lot of people realizing they need more support when they retire,” King says. “When you add in some part-time work, it sometimes triggers a plan that wouldn’t have worked otherwise.”
Other factors that contribute to a secure retirement plan
In addition to spending less, saving more and being open to working longer or working during retirement, there are other characteristics that can help retirees create a secure retirement.
In its survey, T. Rowe Price found:
Nearly half of retirees (48%) indicated they had a withdrawal plan, and the average retirement withdrawal among them was 4% of their investable assets over the past year.
Retirees report living on only 66% of their pre-retirement income on average, which is less than the 70% to 80% that some financial planners and investment firms suggest people take into account when planning for retirement.
Although everyone’s needs and desires are different, all of these characteristics can help point retirees and retirees in the right direction.
“They’re all related. “Definitely save more and spend less, that’s the key to the whole thing,” says King. “Have a goal and know how much money you’ll need to accumulate before retirement to get the lifestyle you want.”
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