Retirement is a time when you can finally take a step back from the daily grind, but financial independence is key to ensuring it is the fulfilling chapter you envision. While the goal is to enjoy your golden years with freedom and comfort, reaching that goal requires thoughtful preparation.
With uncertainties about how long you will live, how the market will behave, and how your expenses will change, a strategic approach to financial independence becomes essential.
Save Early to Secure Your Future
Starting early with retirement savings maximizes compound interest. Ronald Read, a janitor, amassed $8 million by consistently investing small amounts. His story, shared by Morgan Housel in The Psychology of Money, highlights that wealth comes from consistent, early investing, not high earnings.
Waiting until your fifties to start saving might seem practical when you’re juggling other financial priorities, but Housel shows how this delay can cost you dearly. Warren Buffett, for example, earned the vast majority of his wealth after age 60. His secret? It wasn’t just investment smarts; it was giving his money decades to grow.
The key lesson? Time is your greatest ally in building wealth.
Plan a Sustainable Retirement Lifestyle
It’s common to dream of a luxurious lifestyle after retiring—perhaps traveling the world or pursuing expensive hobbies—but it’s important to take a realistic approach. Take an objective look at your circumstances before creating your ideal retirement bucket list. Consider your current health, family responsibilities, and overall financial capacity.
Expecting to reduce your expenses significantly in retirement may not always be realistic. While some costs, such as work-related commuting, may decrease, others often increase. Even downsizing may bring hidden costs for repairs, moving, and services you can no longer do yourself.
Diversify Income Streams for Stability
Many people envision that their retirement will be fully funded through work or government pensions. While these are essential components of retirement income, they may not be enough on their own. Relying solely on a pension can be risky, especially considering that workplace pensions often replace only a portion of pre-retirement income, and government pensions may be subject to policy changes.
Consider a diversified investment approach, including individual retirement accounts (IRAs), bonds, and a brokerage account. Diversification reduces dependence on a single income stream and helps during market instability.
For instance, a recent widow in her seventies shared her story with me. Her husband’s pension had stopped, and her income from her investment portfolio wasn’t enough to maintain her lifestyle. Her portfolio consisted mainly of low-dividend stocks and short-term bank deposits—investments that had neither the income-generating potential nor the growth she needed.
I recommended shifting her investments toward income-producing bonds. Bonds, although not without risks, typically offer fixed, reliable interest payments, which can stabilize a retiree’s income. In this case, adding bonds to her portfolio allowed her to receive semi-annual interest payments, supplementing her income and providing the cash flow needed to remain in her beloved home.
In addition to bonds, retirees may also consider brokered certificates of deposit (CDs), which can provide higher interest rates than traditional savings accounts while still offering FDIC insurance. Establishing a mix of growth-oriented investments and income-generating assets can help retirees maintain financial stability.
The journey to retirement can be filled with complexities. A Certified Financial Planner (CFP®) can work with you to develop a comprehensive retirement plan that accounts for cash flow needs, risk tolerance, and lifestyle preferences. Beyond simply crunching numbers, a CFP® can provide emotional reassurance, helping you navigate financial decisions with confidence.
Retirement isn’t about taking risks with your future. It’s about aligning your expectations with your resources, setting realistic goals, and protecting your hard-earned savings. For more retirement planning resources, download a free copy of the Retirement Planning Book at Profile-Financial.com.
Douglas Goldstein, CFP® is the director of Profile Investment Services, Ltd. www.Profile-Financial.com. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of this website, Portfolio Resources Group, Inc. or its affiliates. Nothing in this article is intended to be investment, tax, or legal advice. Information in this article is gathered from sources considered reliable, but we cannot guarantee their accuracy. Past performance is no guarantee of future returns.
